Poverty measurement:

Consumption Aggregate

Strictly Confidential © 2014

Outline
 Session I
I. General Concepts
 What is poverty?
 Why measure poverty
 How do we measure poverty?
II. Consumption Aggregate
 Theoretical principles
 Main components
 Food
 Non-food items
 Durables
 Housing
III. Treatment of outliers
I. Concepts
What is poverty?
Different definitions:
 …from narrow approaches…
lack of specific consumptions (e.g. too little food energy intake; too little
leisure)
 …to broader…
Poverty is the lack of “well-being” (e.g. lack of “capabilities”: inability
to achieve certain “functionings” (“beings and doings”- Amartya
Sen)→ Multidimensional approach
 Poverty is a complex and multidimensional
phenomenon
Why measure poverty?
 Inform program design
 Who are the target groups?
 How should transfers be allocated?
 How much impact will they have on poverty?
 Monitoring progress
 Has poverty increased? Did growth help the poor?
 Foster evidence based policy making
 Who were the losers and winners from economy-wide policy reforms? (ex-ante
vs. ex-post)
 Social spending: who benefits from government subsides? Who will be hurt by
retrenchment?
 But…can inform or misinform anti-poverty policies
 How do we measure poverty?
 
Poverty measurement involves 3 steps:
1. Identify the “space” in which poverty is going to be
measure
We will use consumption as welfare measure
2. Identify “who are poor”: dichotomize the
population between poor and non-poor. Tool:
Poverty line (z)
Poor = Non-poor =
How do we measure poverty?
 Types of Poverty Lines
 Objective:
 Absolute
 Relative
 Hybrid Lines
 Subjective

 We will adopt a absolute approach for the poverty line

 How do we measure poverty?
 
3. Aggregation:
Construct an index that summarizes the information
and gives an overall picture of poverty
A poverty measure is a function:

which indicates the level of poverty in each

distribution
 How do we measure poverty?

1. A welfare measure for

individuals, used to
derive a distribution Number
of people
of living standards
2. A poverty line, threshold
below which individuals
are classified as poor
3. A poverty measure, Welfare
Indicator
summary statistics of
poverty in population
II. Consumption Aggregate
Outline
 Theoretical
principles
 Main components
 Food items
 Non-food items
 Durables (session 4)
 Housing (session 5)
Constructing the consumption measure
 The consumption measure is the foundation over which all
poverty analysis rests
 Principles:
 Goal is to be able to rank individuals in terms of welfare
 Should be comprehensive
 Retain transparency and credibility
 Important clarifications
 Consumption: destruction of goods and services by use
 Expenditure: consumption valued at prices paid
 Income: maximum possible expenditure on consumption
without depleting assets
Conceptual framework
  Starting point
 Household h chooses the consumption of individual goods to
maximize utility within a given budget and at given prices
 Instead of reference set of quantities → prices &
calculate the amount of money needed to reach the
indifference curves
 Money metric utility for household h:

Which is the minimum cost of reaching at prices

Conceptual framework
  The exact calculation requires the knowledge of
preferences but a shortcut method → first-order expansion
in prices around

Since the minimum cost of reaching at is the amount spent

then
Conceptual framework
  

 Antecedent:
 Food items
 Non-Food items
 Durables
 Housing
 Consequent:
 Price adjustment (Session II)
Food Items
  In general is a straightforward aggregation exercise

Total Food Consumption =

 = Quantities of different food items consumed or purchased by

the household from different sources: market place, home-
produced, received as gifts and in-kind payments;
 = Reference set of prices paid by the household
 Or total value
 In the reference period
Food Items
 Reference period
 Choose the alternative that is likely to provide the most
accurate estimate of usual consumption for each household
 Surveys vary in terms of reference periods
 Diary methods rather than recall periods
 Longer reference: reduces problems of seasonality but suffer of
measurement error (recollection difficulties)
 Shorter reference: affected by purchases from outside the usual
period
 In principle, it is the value of the food consumed that
should go into the consumption aggregate but surveys fail
to capture this value → overstate poverty
Food Items
 Valuation problem
1. There are quantities “consumed” or “purchased” and no
prices
 Closer approximation to the amount actually paid
 Values reported by households better than market prices
 Use median paid by other households in the same cluster
 If not available use prices reported by other households in
the same sub-region, district, division or province
 Checking that prices being imputed are reasonable
 Reminder: be aware of how the welfare ranking would be
affected by these decisions
2. Specific food items such as home-produced or rations
Food Items
 Home-produced food items
 Which price?
 Market price from food purchases section
 “Farm-gate” prices:
 Households’ own valuation of the amount they would
expect to receive (pay) if they had sold (bought) the
item or
 Agriculture production questionnaire: “How much of
the …[crop]…did the household keep for consumption
at home?”
An example of Rations Items
 Quantities
 Three possibilities:
1. Net quantity received in a month = Quantity received
– Bartered/Sold/Given away
 Receipts are not consumption
 Recall period unclear
 Receipts may not reflect utility- i.e., two households who
receive the same amount, but consume very different amounts,
derive different utility from rations
Measuring rations
2. Purchases of ration items in the diary
 Recallperiod = 7 days
 Consistent with other food items
 Few observations

3. Quantity of ration items consumed during the last 30

days
 Recall period clear
 If two households consume the same amount, they must derive
the same utility from it
 Ration item quantity:
Quantity of ration item consumed during the last 30 days +
((Quantity of ration item consumed (purchased) in diary, if any) *
(365/12)) / (total days of purchases reported in diary)
How do we value rations?
 Three possibilities:
1. Unit values from diary purchases
2. Official prices for ration items
3. Self-reported: What price would you pay in the market to
buy the ..[ITEM].. of same quality?
Principles of valuing rations
 Unlike other goods, no market equivalent price exists for
rations. Rations are rarely transacted on the market, as
evident in the limited number of diary transactions.

  % of households reporting diary purchases

Rice 0.027
Brown wheat 0.007
Sugar 0.009
Vegetable oil 0.011
Vegetable fat 0.002
Children's food 0.000
Lentils 0.002
White wheat 0.013
Principles of valuing rations
 Other possibilities for pricing rations are official
prices or self-reported prices (q308)
 Want to assign a value as close to one at which we
expect it to be traded
 So official prices are not appropriate, because it is not
the price at which households can procure unlimited
quantities
 Is there a close substitute to ration items that are
traded in the market?
 Unit values for these substitutes are significantly higher for
some items, suggesting important quality differences.
Especially for Rice
Rice
Self-reported ration prices 0.712
Unit values from diary 0.746
Unit values for domestic commercial rice 1.272
Unit values for imported commercial rice 1.795

Brown wheat flour

Self-reported ration prices 0.498
Unit values from diary 0.498
Unit values for commercial wheat flour 0.499

Sugar
Self-reported ration prices 1.476
Unit values from diary 1.493
Unit values for commercial wheat flour 1.493
Recommendation based on these principles
and discussions with experts
 Only price available is “What price would you pay in the market
to buy the ..[ITEM].. of same quality?”
 As these were in effect, collected by enumerators by visiting the
ration agent in the cluster, these are closer to a price survey
 But variations may reflect noise, uncertainty, local variations in
supply and demand
 Need to ensure that all those who consume exactly the same
amount of a ration item are assigned the same expenditure; and
that this expenditure increases with higher consumption
 Recommendation: Use national median values of prices reported
by ration agents.
Non-Food items
 Wide range of non-food items
 Collected on daily-use as well as other less frequent purchased
items
 Different reference periods often used, so make them comparable
 Computation is straightforward but difficulties in the choice of
which items to include
 General considerations:
 Avoid lumpy expenditure (i.e. large and infrequent: weddings, birth,
funerals, among others)
 Avoid items for which is hard to estimate accurately (i.e. public
goods and leisure)
 Distinguish between investments and consumption
 Avoid double counting: transfers to other households
Non-Food items
 In general include:
 Frequently purchases goods and services (e.g. soap, cooking
fuel, personal care, recreation, transport, supplies)
 Less frequent but regularly purchased items (e.g. clothing,
kitchen equipment, textiles, household items)
 In general, exclude:
 Business-related expenses
 Large occasional expenditures
 Remittances paid; gifts and transfers out
 Taxes paid
 Repayment of loans, interest payments, purchase of financial
assets
Non-Food items
 Health
 These expenditures are generally excluded because…
 They can be lumpy (i.e. large occasional expenditure)
 It is not a welfare enhancing: inability to measure the loss of welfare
associated with being sick which is ameliorated by health expenditures
 But we miss the difference between sick individuals: one who
can afford health care and other who can not
 Education
 Can be lumpy
 Can be considered as investment rather than consumption
 However, these are not irregular as health expenditure (regular
at a particular point in the life-cycle)
III. Treatment of Outliers
Outliers
 Definition
 How to deal with “gross” outliers?
 There is no straightforward rule to follow except…
 Paying attention to what data shows (i.e. maintain a
“reasonable” dispersion) and
 Magnitude of the change you are imposing with the correction
method
 Use more than one rule: graphs such as histograms and
automatic corrections
Outliers
 Few examples:
 Not only isolated outliers but also groups of outliers
 Units have been misinterpreted for instance, eggs measured in units
for some households and dozens for others
 Spatial disparities
 If there are significant regional disparities across the country then
correction must NOT be made at national level
 Temporal disparities
 Correcting quantities consumed by households independently of when
they do it may squeeze the distribution
Outliers
 Automatic rule example of detection of outliers for unit
values
 Eliminate those whose logarithm lie more than 2.5 standard
deviations from the mean of logarithms
 Again this DOES NOT remove the need for graphical
inspection and reasonable judgment of the analyst
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