Week 3, Part 2: Poverty and Vulnerability Analysis
ECON 370: Economic Development
Spring 2025
Ömer F. Sözbir
Please do not distribute.
Introduction
As with all aspects of development, we need to address poverty through positive & normative analyses.
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Introduction
As with all aspects of development, we need to address poverty through positive & normative analyses.
Positive analysis: How do we characterize and explain poverty through diagnostics and identification
of causal determinants?
Normative analysis: What can be done to reduce poverty using well-designed and targeted policies
and programs?
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Introduction
As with all aspects of development, we need to address poverty through positive & normative analyses.
Positive analysis: How do we characterize and explain poverty through diagnostics and identification
of causal determinants?
Normative analysis: What can be done to reduce poverty using well-designed and targeted policies
and programs?
The state of the poverty research:
- there exist considerable expertise in characterizing, measuring, and analyzing poverty,
- but poorly equipped to explain it, especially the rigorous establishment of causal determinants,
- also quite weak at understanding what works and does not work to reduce poverty.
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Positive Analysis of Poverty
Steps for the positive analysis:
- Choose a monetary indicator of well-being that can be used to characterize poverty.
- agree on a threshold level for this indicator,
- called a poverty line, below which people will be called poor,
- develop a number of poverty indicators that measure various aspects of poverty in a population.
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Positive Analysis of Poverty
Steps for the positive analysis:
- Choose a monetary indicator of well-being that can be used to characterize poverty.
- agree on a threshold level for this indicator,
- called a poverty line, below which people will be called poor,
- develop a number of poverty indicators that measure various aspects of poverty in a population.
- Look at special aspects of poverty.
- distinction between chronic vs. transitory poverty,
- vulnerability to poverty,
- inter-generational transmission of poverty.
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Positive Analysis of Poverty
Steps for the positive analysis:
- Choose a monetary indicator of well-being that can be used to characterize poverty.
- agree on a threshold level for this indicator,
- called a poverty line, below which people will be called poor,
- develop a number of poverty indicators that measure various aspects of poverty in a population.
- Look at special aspects of poverty.
- distinction between chronic vs. transitory poverty,
- vulnerability to poverty,
- inter-generational transmission of poverty.
- Using household survey data, identify the households in poverty.
- obtain a description of the poor,
- who are they? where are they located? what do they do?
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Positive Analysis of Poverty
Steps for the positive analysis:
- Choose a monetary indicator of well-being that can be used to characterize poverty.
- agree on a threshold level for this indicator,
- called a poverty line, below which people will be called poor,
- develop a number of poverty indicators that measure various aspects of poverty in a population.
- Look at special aspects of poverty.
- distinction between chronic vs. transitory poverty,
- vulnerability to poverty,
- inter-generational transmission of poverty.
- Using household survey data, identify the households in poverty.
- obtain a description of the poor,
- who are they? where are they located? what do they do?
- Construct poverty maps to visualize the geographical location of different aspects of poverty.
- overlay these maps with possible determinants of poverty (distance to a city, population density, etc.),
- consequences of poverty (such as crime and disease),
- and instruments to reduce poverty (such as social expenditures).
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Characterize Welfare: Choice of an Indicator of Well-being
What indicator (y ) to use to measure well-being?
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Characterize Welfare: Choice of an Indicator of Well-being
What indicator (y ) to use to measure well-being?
There are two monetary indicators (available in household surveys) that we could use to measure an
individual’s level of well-being at a particular point in time.
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Characterize Welfare: Choice of an Indicator of Well-being
What indicator (y ) to use to measure well-being?
There are two monetary indicators (available in household surveys) that we could use to measure an
individual’s level of well-being at a particular point in time.
1. Income per capita,
- not the best measure!
- a mean, not an end,
- it fluctuates: temporarily low/high income would give an erroneous characterization of well-being,
- measurement:
- questions are asked about all members of the household regarding their activities and earnings,
- with casual workers or day laborers, earnings are irregular over the course of the year,
- needs to add income from own enterprise or agricultural activities,
- additionally, return to assets, transfers across households, income earned abroad, and remittances,
- all difficult to measure as transactions are irregular and rarely recorded.
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Characterize Welfare: Choice of an Indicator of Well-being
2. Consumption (or expenditures) per capita,
- the better one!
- closer to well-being as it creates utility,
- consumption is smoothed,
- measurement:
- questions are asked to report all consumption/expenditures over a defined time period,
- usually a week for food, a month for semi-durable goods, and a year for investment and durable goods,
- large errors in reporting consumption,
- recalls can only be approximate,
- different household members may have different level of knowledge about the different expenditures,
- extrapolating responses from week to year may be erroneous if there is strong seasonality,
- how do we measure expenditure on durable goods?
- many commodities consumed are home-produced, including food and z-goods; how to value them?
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Characterize Welfare: Choice of an Indicator of Well-being
2. Consumption (or expenditures) per capita,
- the better one!
- closer to well-being as it creates utility,
- consumption is smoothed,
- measurement:
- questions are asked to report all consumption/expenditures over a defined time period,
- usually a week for food, a month for semi-durable goods, and a year for investment and durable goods,
- large errors in reporting consumption,
- recalls can only be approximate,
- different household members may have different level of knowledge about the different expenditures,
- extrapolating responses from week to year may be erroneous if there is strong seasonality,
- how do we measure expenditure on durable goods?
- many commodities consumed are home-produced, including food and z-goods; how to value them?
Question: Any other issue/problem with using consumption as a well-being indicator?
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Characterize Welfare: Choice of an Indicator of Well-being
2. Consumption (or expenditures) per capita,
- the better one!
- closer to well-being as it creates utility,
- consumption is smoothed,
- measurement:
- questions are asked to report all consumption/expenditures over a defined time period,
- usually a week for food, a month for semi-durable goods, and a year for investment and durable goods,
- large errors in reporting consumption,
- recalls can only be approximate,
- different household members may have different level of knowledge about the different expenditures,
- extrapolating responses from week to year may be erroneous if there is strong seasonality,
- how do we measure expenditure on durable goods?
- many commodities consumed are home-produced, including food and z-goods; how to value them?
Question: Any other issue/problem with using consumption as a well-being indicator?
Consumption expenditures vary with taste and context:
- some people do not spend money on meat, just because they do not like it,
- people living in cold climates will necessarily have higher expenditures on clothing and heating.
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Characterize Welfare: Choice of an Indicator of Well-being
Use of income or consumption to measure well-being (a) across time and (b) across the life cycle.
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Characterize Welfare: Choice of an Indicator of Well-being
Household vs. individual well-being:
- consumption expenditure is measured at the household (hh) level,
- hh is the unit of decision-making for purchases of consumer goods and the production of z-goods,
- but a given expenditure for a household of ten creates less well-being than for a household of two.
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Characterize Welfare: Choice of an Indicator of Well-being
Household vs. individual well-being:
- consumption expenditure is measured at the household (hh) level,
- hh is the unit of decision-making for purchases of consumer goods and the production of z-goods,
- but a given expenditure for a household of ten creates less well-being than for a household of two.
Question: How to measure individual well-being, based on per capita consumption?
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Adult Equivalence Scales
Adult equivalence scales:
- used to measure per capita consumption,
- idea: take into account differences in demographic composition for comparisons across households,
- giving consumption weights to hh members according to their gender and age that correspond to
their relative consumption levels.
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Adult Equivalence Scales
Adult equivalence scales:
- used to measure per capita consumption,
- idea: take into account differences in demographic composition for comparisons across households,
- giving consumption weights to hh members according to their gender and age that correspond to
their relative consumption levels.
The gender- and age-adjusted family size in adult equivalence scale n∗ is:
X
n∗ = wk nk ,
k
- nk : number of hh members in category k,
- wk : consumption weight of demographic category k.
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Adult Equivalence Scales
OECD equivalence scale, for example, assigns a value of 1 to the first household member, of 0.7 to
each additional member age 14 and over (i.e, adult or older children), and of 0.5 to each child under 14:
n∗ = 1 + 0.7 × (number of adults or older children - 1) + 0.5 × number of children.
e.g., a hh with 2 adults and 2 children (<14) would have an adult equivalent size n∗ equal to 2.7.
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Adult Equivalence Scales
OECD equivalence scale, for example, assigns a value of 1 to the first household member, of 0.7 to
each additional member age 14 and over (i.e, adult or older children), and of 0.5 to each child under 14:
n∗ = 1 + 0.7 × (number of adults or older children - 1) + 0.5 × number of children.
e.g., a hh with 2 adults and 2 children (<14) would have an adult equivalent size n∗ equal to 2.7.
World Bank’s Living Standards Measurement Survey (LSMS) frequently use the following scale:
n∗ = number of adults above 17 + 0.5 × number of children 13 to 17 +
0.3 × number of children 7 to 12 + 0.2 × number of children 0 to 6.
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Adult Equivalence Scales and Economies of Scale
Per capita consumption should also allow for the existence of economies of scale in consumption for
hh-level public goods (housing, heating, electricity) vs. private goods (food, child education).
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Adult Equivalence Scales and Economies of Scale
Per capita consumption should also allow for the existence of economies of scale in consumption for
hh-level public goods (housing, heating, electricity) vs. private goods (food, child education).
Total household consumption is:
y = Cf + ph Ch ,
- Cf : consumption expenditure on private goods f such as food,
- Ch : consumption expenditure on household-level public goods h such as housing,
- ph : price of housing (with food price as numeraire, pf = 1).
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Adult Equivalence Scales and Economies of Scale
Per capita consumption should also allow for the existence of economies of scale in consumption for
hh-level public goods (housing, heating, electricity) vs. private goods (food, child education).
Total household consumption is:
y = Cf + ph Ch ,
- Cf : consumption expenditure on private goods f such as food,
- Ch : consumption expenditure on household-level public goods h such as housing,
- ph : price of housing (with food price as numeraire, pf = 1).
Per capita consumption is then,
Cf
ypc = + ph Ch ,
n∗
where n∗ : number of adult equivalent household members, and Ch is a pure public good.
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Adult Equivalence Scales and Economies of Scale
Question: Consider an adult equivalence scale where the first household member is assigned a value of
1, each additional adult member (18 and above) is assigned a value of 0.5, and each child (below 18)
is assigned a value of 0.3. What is the adult equivalence size n∗ of a couple with three children?
Question: What are the possible drawbacks of this weighting?
Question: Suppose that the total expenditure of the household is 340$, which is spent only on private
goods (i.e., no public goods). What is per capita consumption of each member?
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