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The poverty gap measures the average shortfall from the poverty line and reflects the intensity of poverty. The headcount index measures the proportion of people below the poverty line. The Lorenz curve graphs the proportion of overall income or wealth received by the bottom percentage of the population, and can show more or less equal distributions by appearing closer to or farther from the line of perfect equality.

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Muhammad Ammar Nisar
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25 views2 pages

New DOCX Document

The poverty gap measures the average shortfall from the poverty line and reflects the intensity of poverty. The headcount index measures the proportion of people below the poverty line. The Lorenz curve graphs the proportion of overall income or wealth received by the bottom percentage of the population, and can show more or less equal distributions by appearing closer to or farther from the line of perfect equality.

Uploaded by

Muhammad Ammar Nisar
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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What is poverty gap? What is the advantage of this measure over the headcount index?

 
Poverty Gap
The poverty gap is the average shortfall of the total population from the poverty line. This
measurement is used to reflect the intensity of poverty. The poverty line used to measure this gap
is the amount typical to the poorest countries in the world combined with the latest information
on the cost of living in developing countries. The poverty line is indicated by the widely
accepted international standard for extreme poverty. This standard is $1.25 daily. However, it's
been difficult to set a common international poverty threshold since different countries have
different thresholds for poverty. 
Advantages of head counter index. 
The Headcount Index is calculated by taking the total number of people in a country who fall
below a predetermined income level and dividing this figure by the total population. In other
words, the Headcount Index is simply the percentage of the population that falls below the
official poverty line.
Head count Ratio
The Head count ratio (HCR) is the proportion of a population that exists, or lives, below the
poverty line.
Advantage of head count ratio
One of the major advantages of the HC is that it is very easy to understand and interpret. It is
then very convenient for communication towards the general public. But besides good
communication properties, we also expect from an indicator of poverty that it reflects well the
intuitions we have of this concept: does it react well to the changes of the underlying income
distribution? By means of examples we shall now point to several weaknesses of the HC.
2. What is the Lorenz curve and how do you construct it? Draw a relatively equal and a
relatively unequal Lorenz curve. Explain the difference.
In economics, the Lorenz curve is a graphical representation of the distribution of income or of
wealth. It was developed by Max O. Lorenz in 1905 for representing inequality of the wealth
distribution.
The curve is a graph showing the proportion of overall income or wealth assumed by the bottom
x% of the people, although this is not rigorously true for a finite population (see below). It is
often used to represent income distribution, where it shows for the bottom x% of households,
what percentage (y%) of the total income they have. The percentage of households is plotted on
the x-axis, the percentage of income on the y-axis. It can also be used to show distribution of
assets. In such use, many economists consider it to be a measure of social inequality.

The concept is useful in describing inequality among the size of individuals in ecology[1] and in
studies of biodiversity, where the cumulative proportion of species is plotted against the
cumulative proportion of individuals.[2] It is also useful in business modeling: e.g., in consumer
finance, to measure the actual percentage y% of delinquencies attributable to the x% of people
with worst risk scores.
Relatively equal and unequal loranz curve

Difference between relatively equal and unequal loranz curve


The Lorenz curve is often accompanied by a straight diagonal line with a slope of 1, which
represents perfect equality in income or wealth distribution; the Lorenz curve lies beneath it,
showing the actual distribution. The area between the straight line and the curved line, expressed
as a ratio of the area under the straight line, is the Gini coefficient, a measurement of
inequality.While the Lorenz curve is most often used to represent economic inequality, it can
also demonstrate unequal distribution in any system. The farther away the curve is from the
baseline, represented by the straight diagonal line, the higher the level of inequality. In
economics, the Lorenz curve denotes inequality in the distribution of either wealth or income;
these are not synonymous since it is possible to have high earnings but zero or negative net
worth, or low earnings but a large net worth.

The Gini coefficient is used to express the extent of inequality in a single figure. It can range
from 0 (or 0%) to 1 (or 100%). Complete equality, in which every individual has the exact same
income or wealth, corresponds to a coefficient of 0. Plotted as a Lorenz curve, complete equality
would be a straight diagonal line with a slope of 1 (the area between this curve and itself is 0, so
the Gini coefficient is 0). A coefficient of 1 means that one person earns all of the income or
holds all of the wealth. Accounting for negative wealth or income, the figure can theoretically be
higher than 1; in that case, the Lorenz curve would dip below the horizontal axis. 

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