Policies for Growth

Module 01
Growth Models and Poverty

World Bank
Institute

Presentation Script

Policies for Growth

Module 01: Growth Models and Poverty Presentation Script

Introduction and Objectives In this presentation, we will: Define poverty Identify methods of measuring poverty and economic growth Describe relationships between economic activity and growth, as captured by GDP and its movements

Slide 3 In order to measure the extent of poverty, we must understand what poverty is. To do this, we begin with a definition of well-being. We can think of well-being as command over resources, as access to assets or as the ability to function in society. Poverty, then, would be the critical shortages of those elements. Sometimes people think of poverty only in monetary ways; however, poverty has no monetary dimensions as well.

Slide 4 Poverty is not just a shortage of resources, but a more general state of vulnerability marked by the lack of access to health services and education, low self-confidence, and a sense of powerlessness. Although no monetary aspects of poverty are important, they are more difficult to measure, so they are excluded from most poverty measures. They are still important to consider when trying to comprehend the extent of poverty in one country.

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Policies for Growth

Module 01: Growth Models and Poverty Presentation Script

Slide 5 So, how exactly do we measure poverty? Well, there are three basic steps: (1) An indicator of welfare must be defined; (2) A minimum acceptable standard of that indicator must be established to separate the poor from non-poor (this is also known as the poverty line); and (3) A summary statistic must be devised to aggregate the information obtained from the distribution of the chosen welfare indicator. The position of that summary statistic relative to minimum acceptance stands must be determined. But what does this all mean? We will now discuss this in a less technical way.

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Policies for Growth

Module 01: Growth Models and Poverty Presentation Script

Slide 6 To begin, most measures of economic welfare are based on household expenditures for consumption purposes. Consumption-based measures are preferred by poverty analysts to household income because people are generally more willing to report what they spend than what they have earned. In order to make comparisons across households, it is necessary to calculate the value of durable goods owned by the household in the year of measurement, including the depreciation of the item and the interest cost of having money locked up in the item.

Slide 7 Since households differ in size and composition, a simple comparison of what one household spends can mislead us about the well-being of the individual in a given household. For this reason, we convert household consumption to individual consumption by dividing household expenditures by the number of people in the household. Unfortunately, this easy conversion does not take into account the fact that different individuals have different needs. (For example, a young child typically needs less food than an adult). We deal with this problem by assigning weights, using an equivalence scale that measures the number of adult males to which the household is equivalent. This way, each member of the household counts as a fraction of an adult male.

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Policies for Growth

Module 01: Growth Models and Poverty Presentation Script

Slide 8 Once we have computed a households consumption, we need to evaluate whether the amount places the household in poverty. For this, we use a threshold known as the poverty line. The poverty line represents a minimum standard required by an individual to fulfill his or her basic food and non-food needs. In practice, it makes sense to define more than one poverty line, because there are many ways to evaluate whether or not an individual or household is poor. Therefore, we can generate a poverty line for all households in a given group and adjust it from household to household to take into consideration the differences in prices they face, as well as differences in the demographic composition of households.

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Policies for Growth

Module 01: Growth Models and Poverty Presentation Script

Slide 9 Now that we know the way in which we measure poverty, we need to understand our data source. The main instruments for collecting data are household surveys. In essence, researchers will ask a sample of households to fill out a survey regarding their level of consumption. A sample is a part of the population that the researcher estimates is representative of the entire population with some degree of error.

Slide 10 So far, we have talked about what poverty is and the method used in order to measure it. But, what is the best way of measuring whether or not economic growth is benefiting the poor? This has been debated, but essentially the question that needs to be answered is how to assess whether a unit of growth increases the consumption of the poor by at least as much as it does for the economy as a whole. So how do we do that?

Slide 11 Well, poverty measures are a prerequisite for any study of how economic policies affect the poor. However, measuring poverty is only the first step toward pro-poor economic policies. Page 5 of 9

Policies for Growth

Module 01: Growth Models and Poverty Presentation Script

We will now focus on how economic growth is measured through the concept of gross domestic product (GDP) by identifying the components of growth and examining their relations within the national accounts framework.

Slide 12 GDP is a key measure of the amount of economic activity in a country. GDP allows for the comparison of economic data across countries. In order to make comparisons meaningful, the GDP of each country must be expressed in terms of a common unit, such as U.S. dollars.

There are three approaches to GDP: The first is the Production Approach. In this approach, GDP is the sum of gross value added in the economy or the difference between the value of production and the value of all goods and services used in the production process. The second is the Expenditure Approach. In the expenditure approach, GDP measure the spending by households, enterprises, government and the rest of the world on final goods and services.

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Policies for Growth

Module 01: Growth Models and Poverty Presentation Script

The final approach is the Income Approach. GDP in this sense is measured as the sum of the incomes generated by resident producers.

Slide 13 Because GDP measures the total value of a nations output in a given year, it captures both the changes in output and the changes in the prices of that output over time. In order to isolate changes in physical output over time, we differentiate between nominal and real GDP. Nominal GDP measures the value of output of the economy at current prices. Real GDP (also known as GDP at constant prices) measures the value of a countrys output using the prices of a single base year. Real GDP is the most widely used measure of real income growth.

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Policies for Growth

Module 01: Growth Models and Poverty Presentation Script

Slide 14 The economic system traditionally cycles through booms and busts, a movement known as the business cycle. The purpose of macroeconomic policy is to smooth out the business cycle by balancing growth, unemployment and inflation. When we look at the GDP growth rate, we will notice that it reaches maximum and minimum points with some degree of regularity. Individual business cycles vary substantially in duration and intensity, but they all display the common phases of peak, recession, trough and recovery.

Slide 15 Now, lets take a look at each of the different parts of the business cycle. A peak is the point at which business activity has reached a temporary maximum. This is point A in the figure. This means that the economy is at full employment and the level of real output is at or very close to its capacity. The peak may be followed by a period of decline in total output, income, employment and trade lasting at least six months. This is known as a recession or point C in the figure. Activity in the economy is retracting. The trough of the slowdown is the phase in which output and employment reach their lowest levels. This is point B in the figure. In the phase of recovery, output and employment increase toward full employment.

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Policies for Growth

Module 01: Growth Models and Poverty Presentation Script

Summary This presentation defined poverty identified methods of measuring poverty and economic growth described the relationships between economic activity and growth, as captured by GDP and its movements

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