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Comparison of Inequality and Poverty Measures

The problems of inequality and poverty are among the most heatedly discussed and topical questions of the XX century. The abundance of developing countries (many of which had appeared on the world map due to social upheavals and coup d’etat, or, which is worse, as a result of revolutions – whether peaceful or not) had resulted in the aggravation of the inequality problems.

The term “inequality” is a complex issue that consists of numerous aspects of life – normal provisioning, medical care, education, conditions of work, gender, freedom of choice, etc.

But simply being aware of a problem does not solve it, neither do the debates. Only proactive economic programs of poverty and inequality elimination would change the actual matter of facts.

The existing programs are far from being perfect, taking into consideration the fact that, by now, there even are no universal methods of measuring the levels of inequality. The list of most popular instruments of measurement includes: the functional and size distribution, Lorenz curves, Gini coefficient, the Kuznets’s inverted-U hypothesis, the headcount index, total and average poverty gap, and the Human Poverty Index. These are the measures most commonly used nowadays. They are certainly not ‘ideal’, because most of them disregard many important aspects of life and principles of income distribution, and are too generalizing.

The two most commonly used principles of calculating the inequality levels – the size and the functional measures of income distribution – are the basis for further calculations and analysis.

The first one is the most popular among the economists: it is based on the total amount of income received by an individual or a household, disregarding the source of the benefits (employment – occupational sources are neglected as well, interests, rents, gifts, inheritance, etc). The incomes of different individuals are arranged in a general (descending) consequence, and then divided into several groups (sized one-fifth (quintiles) or one-tenth (deciles)). The proportions of national income distribution are then determined for each group, and the inequality level is defined. Other methods, for example, the Lorenz Curve helps to analyse the income statistics in a more graphic and evident manner. The numbers of income recipients (in cumulative percentages) are plotted on the horizontal axis (total is equal to 100%), while the vertical axis represents the share of total income received by each percentage of population (also cumulative to 100%). The figure is a square bisected by a diagonal line is drawn from the origin to the upper right corner, and the curve that depicts the actual share of income in the society (the more it curves away from the diagonal (the greater the bend and the closer it is to the bottom horizontal axis), the greater degree of inequality is represented. The curve depiction enables to use another coefficient – Gini concentration ratio – a correlation of the area between the diagonal and the Lorenz curve divided by the total area of the half-square in which it lies (ranges from 0 (perfect equality) to 1 (perfect inequality)).

The functional distribution deals with the income that is received by different factors of production (land, labour, capital). But this theory is not flawless, as it does not take into consideration the nonmarket forces (e.g. power, collective bargaining, personal advantage in lobbying, etc).

The headcount index is a ratio calculated as a fraction of those, whose incomes are below the poverty line, to the total number of population.

The poverty gap represents an amount of income needed to raise those, who are below the poverty line, up to it. The total poverty gap is the amount of money per day it would take to bring every poor person in an economy up to our defined minimum income standards. The average poverty gap is the correlation of the TPD to the headcount index.

The Human Poverty Index (developed by UNDP) is based on considering the level of three basic deprivations (of life, basic education, and general economic provisioning).

Simon Kuznets’ inverted-U hypothesis suggested that the distribution of income will tend to worsen in the early stages of economic growth, but at later stages it will improve. Kuznets illustrated this hypothesis in the form of the graph, and, having studied the conditions of economic growth in some developing countries, found empirical evidence of it. But further studies of developing countries did not completely support it.

Measuring inequality and poverty is a very sensitive case, because there is no perfect instrument to do it. The subjectivity of the matter is doubled by disregarding certain aspects of income distribution and excessive generalization. The choice of the measuring instrument depends upon the needs of the analysis and essence of the studied problem. The more aspects are taken into consideration – the more precise and helpful is the measurement. And this will enable to solve the problem of widespread poverty – a real challenge to the civilized society we want to live in.

Sources:
Todaro, M.P. and Smith, S.C., (2006) Economic Development, 9th edition, Pearson, Addison – Wesley.