POVERTY

Poverty is a state of an individual who lacks the financial means to cover

basic living expenses. Individuals living in poverty don't have access to
proper housing, medical care, drinking water, and nutritious food.

What is absolute and relative poverty?

Absolute poverty

Absolute poverty can be expressed in terms of the status of an individual

whose material well-being is below the reasonable minimum level
according to the standards of living of the society they belong to. The
‘standard of living’ is measured by the aggregate market value of the
private goods and services the person consumes.

Because absolute poverty compares household poverty relative to the

economic circumstances of a country, what absolute poverty looks like can
vary from country to country.

Individuals living in absolute poverty are not exposed to their

country's economic growth. That is to say that even if the economy grows,
these people remain in poverty.

Relative poverty
Relative poverty occurs when a household earns less than 50% of the
average household income level. These households have some money, but
they can only cover the basic necessities and nothing else. This type of
poverty is a result of changes in the economic conditions of a country and
is essentially a problem of inequality of income distribution.

Relative poverty questions how far a household's standard of living is in

comparison to the richest people and is sometimes described as relative
deprivation. People in this category are not completely poor but their
standard of living is different from the average individual or household in
a country.
The causes of poverty
 Wage inequality: people with lower skills and education find it hard
to get a job. Even if they do, they are underpaid or exploited. This is
harmful in economies that do not have a minimum wage level or
unemployment benefits as it can add to the relative poverty
index. The increase in more part-time and temporary jobs has
decreased the demand and need for full-time jobs with proper
skills. Hence, there is a divide in wages.
 Unemployment: the rapid demand for more temporary jobs and
part-time jobs has left individuals underemployed and has created a
limit to potential income-earning opportunities. The changing
structure of the UK economy as a result of deindustrialisation has
resulted in the loss of jobs. The Covid-19 pandemic has made things
worse: in the past years, the country has recorded the highest
unemployment levels and the number of furloughed workers. This
has resulted in structural unemployment and hysteresis.
 Hysteresis occurs when someone is unemployed for a long time.
This deteriorates their skills and makes it difficult for the person to
find jobs. Ultimately, it leads to long term unemployment.

Impact and effects of poverty

Poverty is a very dangerous issue in today's society and has effects that
impact not only individuals but may result in destabilising whole
economies.Some of the effects of poverty on individuals and the economy
are listed below:
 Health: high rates of poverty lead to lower life expectancy, poorer
standards of health, and underdeveloped infants. Malnutrition has
been an important issue of increasing poverty that affects children's
cognitive development.
 Poor sanitation: people living in poverty are not able to access
basic safe sanitation, which makes them vulnerable to fatal
diseases. This may relatively not impact as much but it shows how it
affects their situation.
 Education: reports mention people living in poverty often have to
choose between eating a meal or getting an education. In certain
economies with high poverty index, children are forced to work in
order to support the family, which leaves them with poor literacy
 skills. This limits their ability as adults to escape the vicious poverty
cycle.

HEAD COUNT RATIO:

The Head Count poverty measurement, also referred to as the "headcount
index", is the proportion of the population which is considered poor. It is
calculated by dividing the number of poor people by the total population.
The best part of the headcount poverty measure is that it is simple to
construct and easy to understand.

Poverty Estimates in India:

Poverty is of two types absolute and relative. Absolute poverty is
measured by the percentage of people living below the poverty line
or by the head count ratio. Relative poverty refers to income
inequality.

In measuring poverty the first step is to set a standard and then

estimate the number of persons who satisfy the standard in
different regions of the country and at different points of time.
However, specification of that standard has to be arbitrary,
reflecting a social value judgment.

The poverty line is updated by estimating what would it cost to

obtain the base year consumption basket with prices prevailing in
subsequent years. The process has one major drawback; it does not
take into account the substitution that consumers may make when
the relative prices of some items of consumption change or their
tastes change.

#)Poverty rate in india:16% as per 2022 and 415 million people in

India have climbed out of poverty since poverty rates have declined.

#) Poverty is defined as the state of not having sufficient income or material

possessions such as food, clothing, and shelter to cover a person’s basic needs.
Poverty remains one the India’s gravest social and economic challenges, despite
its growing economy. In India, poverty is measured based on a methodology
devised by the planning commission called the Tendulkar methodology. This
emphasizes measuring poverty in terms of consumption or spending over a
certain time period. Further, each state in India has its own poverty threshold
which determines the population living below the poverty line.

Poverty Line Debate

Concept of Poverty line and the debate over its

measurement
Concept and measurement:
i) Poverty in India is measured as the head-count ratio of the population living below
the official ‘poverty line’.

ii) The methodology uses the Consumer Expenditure Surveys(CES) conducted by the
National Sample Survey Office(NSSO) of India once every five years to attain the
poverty line.

The Debate
i) Dandekar and Rath estimates:

1)based on average calorie norm of 2250 calories per capita per day for both rural
and urban areas.

ii) Y.K. Alagh Committee (1979) estimates:

1)minimum calorie norm of 2400 calories for rural India and 2100 calories for urban
India

2) suggested poverty estimation for subsequent years were to be calculated by

adjusting only the price level for inflation

iii) Lakdawala Committee (1993):

1)recommendations of this committee initiated the major debates regarding the
estimation of the ‘poverty line’ in India
2) The committee recommended deriving state specific poverty lines using the
Consumer Price Index of Industrial Workers (CPI-IW) in urban areas and Consumer
Price Index of Agricultural Labour (CPI-AL) in rural areas.

3) Following this methodology, the poverty lines had increased nominally and the
headcount ratios declined, however the nutritional attainment of the
populationreflected a decline.

iv) Tendulkar Committee (2009)

1)attempted at changing the composition of the existing consumption basket in order
to take into account thereal needs of the poor people.

2)recognized the ‘structural changes’ in consumption patterns and advanced a

method of constructing ‘cost of living’ indices using the household level consumption
expenditure for different commodities, which also included expenditure on health
and education.

3)the methodology moved away from a calorie based norm of calculating a ‘poverty
line’ citing problems with the nutrition data and replaced it with the
urbanconsumption basket for 2004-05

4)method of using the urban consumption basket for 2004-05 for both rural and
urban areas is laid with problems as it does not take into account the several socio-
economic differences in consumption patterns of rural and urban India.

TRENDS IN POVERTY INEQUALITY:

Poverty rates most commonly measure the number of people living below a particular
income level, relative to society’s norms (see “Measuring poverty,” below). Inequality is a
measure of the distribution of income, which calculates how far the rich are above average as
well as how far the poor are below it.

Defined as: a level of personal or family income below which one is classified as
poor according to governmental standards.

GINI COEFFICIENT:

The Gini coefficient, also known as the Gini index, is the statistical
measure used to measure the income distribution among the
country’s population, i.e., it helps measure the income inequality of
the country’s population.
It is a value between 0 and 1. A higher number indicates a greater
degree of income inequality. A value of 1 indicates the highest
degree of income inequality, where a single individual earns the
country’s entire income. A value of 0 indicates that all individuals
have the same income. Thus, a value of 0 indicates perfect income
equality. One of the Gini index’s limitations is that it requires that no
one has negative net wealth.
Steps to Calculate the Gini Coefficient

1)Organize the data into a table with the category head mentioned below.

2) Fill ‘% of Population that is richer’ column by adding all terms in ‘Fraction of

Population’ below that row.

3) Calculate the Score for each of the rows. The formula for Score is:

Score = Fraction of Income * (Fraction of Population + 2 * % of Population that

is richer).

4) Next, add all the terms in the ‘Score’ column. Let us call it ‘Sum.’

5)Calculate the Gini coefficient using the formula: = 1 – Sum

Example #2

In a particular country, the lowest 10% of the earners make 2% of all wages.
The next 40% of earners make 13% of wages. The following 40% of earners
make up 45% of all wages. Moreover, the highest 10% of all earners make 40%
of all wages. Calculate the Gini coefficient of the country.

Solution:

Use the following data for the calculation.

Let us compile the above information in table format. But, first, the information has
to be compiled by organizing the rows from the poorest to the richest.

Sum of Scores = 0.038+0.182+0.27+0.04 =0.53

The coefficient will be –

Coefficient = 1 – 0.53 = 0.47

Relevance and Uses

The Gini coefficient is for analyzing wealth or income distribution. Therefore, one can
use it to compare income inequality across different population sectors. For instance,
one can compare the Gini index of urban areas in a country with rural areas. Similarly,
one can compare one country’s Gini index to another’s. One can also use it to
find income inequality over some time. For instance, the Gini coefficient in India in
the year 2000 can compare with the coefficient of 2019.
One can use this coefficient along with GDP numbers. If the Gini index is increasing
along with GDP, then there may not be an improvement on the poverty front for
most of the population. Based on this coefficient, welfare measures can be designed
for the population to reduce income inequality.

RELATIONSHIP BETWEEN GROWTH,POVERTY AND

INEQUALITY:

The impact of growth on inequality

1) Economic growth alters the distribution of resources and labour in an economy,

which in turn affects the distribution of income. The Kuznets Curve hypothesis is
grounded in this viewpoint, implying that economic growth leads to an initial
increase in inequality followed by a subsequent decrease.

2)Institutional change is another key mechanism which may cause economic growth
to change the distribution of income in an economy. As average incomes grow there
is a greater demand for adequate public services,and the transaction costs that
constrain institutional change may become more affordable as a consequence of
economic growth.
The Kuznets Curve

The hypothesis that inequality first rises and then falls (in an inverted U-curve) as
economic growth increases and an economy becomes more developed was first put
forward by Kuznets (1955). The proposed cause of the initial increase in inequality is
the shift of workers and resources from agriculture to industry during the early
period of development, creating a significant urban-rural gap. According to this
hypothesis, inequality will only begin to fall later in the development process, once
‘trickle-down development’ leads to workers earning higher wages and a welfare
system being established.

The impact of inequality on growth

1)Credit market imperfections, or an inability of the poor to borrow due to lack of

collateral or underdeveloped capital markets, have been put forward by numerous
authors as a hindrance to economic growth

2)From an institutional perspective, arguments that high levels of inequality can

discourage the development of institutions which make a market environment
conducive to economic growth (e.g. an accountable government).

3)Empirically, the many authors find no clear relationship between overall inequality
and subsequent economic growth. However, there is some consensus that
inequality can negatively impact the growth of poor people’s incomes and positively
impact the income growth of the rich

4)some studies have found that it is inequality of wealth rather than income that is
an impediment to rapid growth. Other authors have argued that it is the impact of
inequality on sustained periods of growth, rather than on the initiation of rapid
growth, that should be assessed. By assessing breaks in growth, they find a robust
association between lower inequality and sustained growth
RELATIONSHIP BETWEEN INEQUALITY AND POVERTY:

1)There are two possible ways of linking inequality to poverty – direct and
indirect. The direct connection between inequality and poverty centers on the
difference in access to wealth distribution. The simplest way to trace it is to
view employment conditions and the level of salaries.

2)The indirect effect of inequality on poverty can be viewed as inequality in

access of educational services.It gains momentum in the long run because
those who have lower educational backgrounds have fewer chances of
occupying well-paid positions and, as the result, it adds to the problem of
poverty.