Poverty and inequality

Measures of poverty

Absolute poverty

According to the World Bank, people are considered to be living in absolute poverty if their incomes fall below the minimum level to meet basic needs such as food, shelter, clothing, access to clean water, sanitation facilities, education and information. This minimum level is usually called the poverty line. The World Bank has set the international poverty line at $1.25 at 2005 GDP measured at purchasing power parity.

One of the key Millennium Development Goals is to halve the number of people living in absolute poverty by 2015. Although the poverty line is designed to provide an objective measure of poverty, the World Bank recognises that what constitutes a minimum level of income to meet basic needs is likely to vary over time and between societies.

Relative poverty

People are considered to be living in relative poverty if they are living below a certain income threshold in a particular country. It may be measured by calculating the percentage of the population living below 60% of median income. Therefore, the concept of relative poverty is:

  • Highly subjective
  • Subject to change over time
  • Not comparable between countries

Relative poverty arises from inequality (see below)

Composite measures of poverty

A composite measure of poverty, devised by the UN as a measure of deprivation, is provided by the human poverty index (HPI). There are in fact two indices, the first of which, HPI-1, is a measure of deprivation in the poorest countries of the world. There are three elements in this index:

  • The percentage of people not expected to reach the age of 40
  • The percentage of the population that are illiterate
  • The average percentage of children who are underweight and the percentage of the population who do not have access to safe water and healthcare

To provide a measure that is more appropriate to developed countries, HPI-2 has been developed. This has the following elements:

  • The percentage of the population not surviving to age 60
  • Percentage of adults lacking functional literacy skills
  • Percentage of population below income poverty line (60% below median average income)
  • Rate of long-term unemployment (lasting 12-months or more)

A cube root of the arithmetic mean of the factors is taken to find both HPI-1 and HPI-2.

Measurements of inequality

Factors influencing inequality

A variety of factors influence the degree of inequality in a country, including the following:

  • education and training
  • wage rate
  • inheritance
  • ownership of assets
  • pension rights
  • unemployment
  • social benefits
  • the tax system

The Lorenz curve

The degree of inequality can be measured using a Lorenz curve, which plots the cumulative percentage of the population against the cumulative percentage of total income. The 45° line represents perfect equality, such as the ‘poorest’ 10% of the population receive 10% of the income. The Lorenz curve represents an unequal distribution of income.

The areas A and B are used to calculate the Gini coefficient.

Gini coefficient

This is a measure of the degree of inequality in a country. It is calculated as follows:

G = A\/B

Where A represents the area between perfect equality and the Lorenz curve, and B represents the total  area under the Lorenz curve.  The Gini coefficient will have values between 0 and 1, with 0 representing absolute equality, and 1 absolute inequality

Consequences of inequality 

Inequality is often regarded as an inevitable cost of economic growth. However, it may be argued that inequality itself may be a constraint on growth and development because:

  • the very poor will have no collateral and so will be unable to start their own business
  • absolute poverty could remain high in countries where inequality is high
  • those on low incomes will have a low marginal propensity to save, so limiting funds available for investment, while those on high incomes may spend a large amount of their incomes on imported goods or may transfer their incomes to other countries (capital flight)
  • there may be socially undesirable consequences of inequality, such as an increase in crime rate

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