Rocha, Cassandra Ng

262-269:
5.1 Measuring Inequality
5.5.1 Size Distributions
5.5.2 Lorenz Curves
5.5.3 Gini Coefficients and Aggregiate Measures of Inequalities
5.5.4 The Ahluwalia-Chenery Welfare Index (ACWI)
269-273:
5.2 Measuring Absolute Poverty
5.2.1 Income Poverty
5.2.3 Multidimensional Poverty Measurement
5.1 Measuring Inequality
This section focuses on defining and measuring income distribution and poverty,
highlighting their dimensions and common elements in developing nations.
Economists typically use two main approaches to analyze and quantify income
distribution:
1. Personal or Size Distribution of Income: Examines how income is distributed
among individuals or households within a population, regardless of the source of
income.
2. Functional or Distributive Factor Share Distribution of Income: Analyzes how
income is distributed across different factors of production, such as labor, capital,
and land, based on their contribution to economic output.

5.5.1 Size Distributions

Definition: Size distributions refer to the statistical representation of the
distribution of sizes (such as income, wealth, or firm size) within a population. These
distributions illustrate how a certain variable is spread across different groups or
individuals.
Function: The function of size distributions is to show the concentration or
dispersion of a particular variable (e.g., wealth, income, population size) across
different segments. They help to measure inequality and provide insight into the
distributional dynamics of the population.
Samples:
 Income Distribution: The proportion of the population that earns different
levels of income.
 Wealth Distribution: The distribution of wealth among individuals or
households.
 Firm Size Distribution: The spread of firm sizes within an industry or
economy.
Demonstration: Consider a population of 100 people with incomes ranging from
$10,000 to $1,000,000. A graph plotting these incomes will show how many people
earn within specific income ranges. If most people earn similar amounts, the
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distribution will be narrow; if there is significant variance in income, the distribution

will be wide.

5.5.2 Lorenz Curves

Definition: The Lorenz curve is a graphical representation of the cumulative
distribution of income or wealth. It plots the cumulative percentage of total income
or wealth against the cumulative percentage of the population, ordered by income
or wealth.
Function: The Lorenz curve is used to assess the degree of inequality in a
distribution. The further the curve is from the line of perfect equality (the 45-degree
line), the greater the inequality. It provides a visual measure of income or wealth
concentration.
Samples:
 A Lorenz curve can be plotted for a country’s income distribution, showing
how the income is spread across its population.
Demonstration: In a perfectly equal society, 10% of the population would have
10% of the wealth, 50% would have 50% of the wealth, and so on, creating a 45-
degree straight line. In a highly unequal society, the curve will bow further away
from this line, indicating that a small percentage of the population holds a large
portion of the wealth.
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5.5.3 Gini Coefficients and Aggregate Measures of Inequalities

Definition: The Gini coefficient is a numerical measure of income or wealth
inequality, ranging from 0 (perfect equality) to 1 (perfect inequality). It is derived
from the Lorenz curve. Aggregate measures of inequality, like the Gini index,
provide a way to summarize the extent of inequality within a population.
Function: The Gini coefficient quantifies the level of inequality in a population. A
lower Gini index indicates less inequality, while a higher index indicates more. It
helps policymakers gauge the effectiveness of wealth distribution policies.
Samples:
 Gini Coefficient of 0.25 would represent a relatively equal society, while a
Gini coefficient of 0.75 would represent a highly unequal society.
Demonstration: The Gini coefficient is calculated by taking the area between the
Lorenz curve and the line of perfect equality, divided by the total area under the line
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of equality. If the Lorenz curve is far from the line of equality, the Gini coefficient will
be high.

5.5.4 The Ahluwalia-Chenery Welfare Index (ACWI)

Definition: The Ahluwalia-Chenery Welfare Index (ACWI) is a composite index
used to measure the welfare of a population, combining elements of both income
inequality and overall income or wealth. It is often used in the context of
development economics to assess both growth and inequality in developing
countries.
Function: The ACWI is designed to assess the impact of growth on inequality and
welfare. It provides a more nuanced measure than simply tracking economic
growth, as it incorporates the distributional aspect of income or wealth.
Samples:
 A country’s welfare index might increase if there is economic growth that
benefits all segments of society, but if the growth disproportionately benefits
the wealthy, the welfare index could still show an unequal distribution of
wealth.
Demonstration: If a country experiences significant economic growth but the
income distribution remains highly unequal, the ACWI may show modest
improvements in welfare despite high inequality. Conversely, if the growth reduces
inequality, the ACWI would reflect more substantial improvements in welfare.

5.2 Measuring Absolute Poverty

5.2.1 Income Poverty
5.2.3 Multidimensional Poverty Measurement

5.2.1 Income Poverty

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Absolute poverty -- The situation of being unable or only barely able to meet the
subsistence essentials of food, clothing, and shelter.
Headcount index -- The proportion of a country’s population living below the poverty
line.
Total poverty gap (TPG) -- The sum of the difference between the poverty line and
actual income levels of all people living below that line.

Definition:
Income poverty refers to a situation where an individual or household has an
income that is below a certain threshold, typically defined as the poverty line. This
threshold is often set by national or international bodies, such as the World Bank,
and represents the minimum income level required to meet basic living standards,
including food, shelter, and clothing.

Function:
The primary function of income poverty measures is to identify individuals or
households that do not have sufficient resources to meet their basic needs. It serves
as a key indicator for policymakers to understand the extent of poverty and to
design interventions aimed at reducing poverty.

Samples:
- Absolute Poverty: A household that earns less than $1.90 a day (according to the
World Bank's international poverty line) is considered to be in absolute poverty,
unable to afford basic necessities.
- Relative Poverty: A person earning below 50% or 60% of the median income in a
country is considered to be in relative poverty, reflecting income inequality within
that society.

Demonstration:
If the poverty line is set at $20,000 per year, a household earning below this
amount would be considered income poor. For instance, if a household earns only
$12,000 annually, they are classified as income poor based on the given threshold.
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5.2.3 Multidimensional Poverty Measurement

Definition:
Multidimensional poverty measurement goes beyond income-based poverty
assessments to consider various other factors that contribute to a person's or
household’s well-being. This approach recognizes that poverty is not solely about
income but also about access to education, healthcare, housing, employment, and
other essential services. One common method of measuring multidimensional
poverty is the **Multidimensional Poverty Index (MPI)**, which incorporates several
indicators.

Function:
The function of multidimensional poverty measurement is to provide a more
comprehensive understanding of poverty by considering various aspects of
deprivation. It helps identify individuals or communities who may not be classified
as income-poor but still experience significant deprivations in multiple areas of life,
thereby helping to design more holistic poverty alleviation policies.

Samples:
- Multidimensional Poverty Index (MPI): Includes indicators such as lack of access to
clean drinking water, inadequate sanitation, poor educational outcomes, and poor
living conditions. An individual might be considered multidimensionally poor if they
lack basic services in multiple dimensions, even if their income is above the poverty
line.
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- Human Poverty Index (HPI): Another example, which also includes life expectancy
at birth, literacy, and access to basic services in the assessment of poverty.

Demonstration:
An individual may earn an income above the poverty line but still face deprivations
in health (e.g., lack of access to healthcare), education (e.g., no schooling), or living
standards (e.g., living in inadequate housing). This person could still be classified as
multidimensionally poor even though they are not income-poor.

5.2.2 Multidimensional Poverty Measurement

Context and Overview: Poverty cannot be sufficiently captured by income alone,
as demonstrated by Amartya Sen’s capability framework, which emphasizes the
need to assess the full range of capabilities that individuals have to live a life they
value. To address this gap, Sabina Alkire and James Foster extended the Foster-
Greer-Thorbecke (FGT) poverty index to encompass multiple dimensions of
deprivation, rather than just focusing on income.
Key Concepts:
1. Dual Cutoff Method:
o The first cutoff level involves identifying deprivation within each
dimension, akin to how the income poverty line is set (e.g., $1.90 per
day in the case of income poverty).
o The second cutoff is the number of dimensions in which a person must
be deprived to be classified as multidimensionally poor. This involves a
threshold, where a person is considered poor if they fall below a cutoff
in a certain number of dimensions (e.g., income, education, health,
etc.).
2. Multidimensional M Index:
o This is a generalization of the traditional FGT index to multiple
dimensions. It calculates poverty by considering not just whether
individuals are poor in one aspect (like income) but whether they are
deprived in multiple aspects (such as education, health, housing).
o The multidimensional headcount ratio (HM) is the fraction of the
population deemed multidimensionally poor, based on the dual cutoff
method. This is similar to the income-based poverty headcount ratio,
but it applies to multiple dimensions of deprivation.
3. M0 – Adjusted Headcount Ratio:
o M0 is the most commonly used measure in practice. It builds on the
headcount ratio (the proportion of the population that is
multidimensionally poor) and adjusts it by considering the intensity of
deprivation (how many dimensions a person is deprived in).
o Formula: M0 = HM * A, where A is the average intensity of poverty,
which is the average number of dimensions in which the poor are
deprived. This provides a more nuanced measure of poverty.
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o Dimensional Monotonicity: This property ensures that if the average

deprivation increases (i.e., people experience more dimensions of
poverty), then M0 will also increase. This is a desirable feature
because it reflects the deeper poverty of those who face multiple
deprivations.
4. Indicators:
o Proxy measures, known as indicators, are used for each of the
selected dimensions. These indicators could include things like years of
schooling, access to clean water, or access to healthcare, and they are
used to assess deprivations in each dimension.
o The UNDP Multidimensional Poverty Index (MPI) is a common
application of this approach, which uses specific indicators across
dimensions like education, living standards, and health to measure
multidimensional poverty across countries.