What is the Poverty Headcount Ratio?
The poverty headcount ratio is an indicator of the incidence of poverty. It is calculated by counting the number of people in a country living with incomes or consumption levels below a given poverty line, and dividing this number of poor people by the entire population in the country.
Measuring poverty through the headcount ratio provides information that is straightforward to interpret; it tells us the share of the population living with consumption (or incomes) below the poverty line.
But measuring poverty through headcount ratios fails to capture the intensity of poverty – individuals with consumption levels marginally below the poverty line are counted as being poor just as individuals with consumption levels much further below the poverty line.
The poverty gap index is an alternative way of measuring poverty that considers the intensity of deprivation.
For more information, data and analysis on poverty headcount ratios, check our entry on Global Extreme Poverty
What is the International Poverty Line?
The International Poverty Line is the threshold used measure extreme poverty. The World Bank is the main source for global information on extreme poverty today and sets the International Poverty Line. This poverty line was revised in 2015 – since then a person is considered to be in extreme poverty if he or she is living on less than 1.90 international dollars (int.-$) per day, at 2011 PPP prices.
For information, data and research on extreme poverty – including a discussion of where the International Poverty Line comes from – check our entry on Global Extreme Poverty
What are PPP conversion rates?
Synonyms: PPP adjustments; PPP rates;
Purchasing power parity rates (PPP rates), are conversion rates used to adjust for cross-country differences in price levels. PPP rates allow translating monetary values in local currencies into ‘international dollars’ (noted int-$). International dollars are a hypothetical currency used as common unit of measure for making cross-country comparisons of monetary indicators of standards of living.
Purchasing power adjustments are necessary because making meaningful cross-country comparisons of standards of living requires ensuring that the data subject to comparison is expressed in the same ‘unit of measure’.
Choosing a common unit of measure is not straightforward when it comes to measuring standards of living through money-metric indicators such as household consumption or average national incomes, because the underlying data is typically calculated in ‘local currency units’.
One way to deal with this is to simply translate all national figures into one common currency (for instance, US dollars) using exchange rates from currency markets. But because market exchange rates do not always reflect the different price levels between countries, economists often opt for a different alternative. They create a hypothetical currency, called ‘international dollars’, and use this as a common unit of measure. The idea is that a given amount of international dollars should buy roughly the same amount – and quality – of goods and services in any country.
The exchange rates used to translate monetary values in local currencies into ‘international dollars’ (int-$) are the ‘purchasing power parity conversion rates’ (also called PPP conversion factors).
In our blog you can read more about where PPP rates come from and why they are useful
What are International Dollars?
International dollars are a hypothetical currency used as common unit of measure for making cross-country comparisons of monetary indicators of standards of living.
International dollars adjust monetary indicators, such as consumption and income, to account for differences in prices between countries. The idea is that a given amount of international dollars should buy roughly the same amount – and quality – of goods and services in any country, at a given point in time.
The exchange rates used to translate monetary values in local currencies into international dollars are the ‘purchasing power parity conversion rates’ (also called PPP conversion rates).
International dollars are often expressed in ‘constant PPP prices’, in order to adjust for changes in the value of money over time (i.e. inflation).
To express monetary values in international dollars at constant prices it is necessary to make two conversions. First, it is necessary to bring monetary values to a base year (something typically done using consumer price indexes); and then it is necessary to convert the values in local currencies at the base year into international dollars using PPP rates for the same year.
For more information, check our blog post What are PPP adjustments and why do we need them?
What is the Poverty Gap Index?
The poverty gap index is an indicator of the intensity of poverty in a population. It is defined as the mean shortfall of the total population from the poverty line (counting the non-poor as having zero shortfall), expressed as a percentage of the poverty line. For a given person, the shortfall from the poverty line corresponds to the amount of money required in order to reach the poverty line.
The poverty gap index is calculated in several steps. First, it is necessary to calculate, household by household, the income or consumption shortfall from the poverty line. Then, to produce aggregate statistics, the sum of all such shortfalls across the entire population in a country (counting the non-poor as having zero shortfall) is expressed in per capita terms – this gives the mean shortfall from the poverty line. Finally, the mean shortfall from the poverty line is divided by the value of the poverty line.
The poverty gap index is often used in policy discussions because it has an intuitive unit (per cent mean shortfall) that allows for meaningful comparisons regarding the relative intensity of poverty.
For more information, data and analysis on the poverty gap index check our entry on Global Extreme Poverty
What are Poverty Traps?
Economists use the term ‘poverty trap’ to denote a situation in which individuals are stuck in deprivation over long periods of time, and there is nothing they can do by themselves to escape such situation. The term captures a situation in which poverty today causes poverty in the future, so households that start poor, remain poor.
Insufficient nutrition, for example, can lead to a poverty trap. More precisely, if physical capacity to work increases nonlinearly with food intake at low levels (i.e. if the first calories that we consume are used by our body to survive, rather than to provide the strength required to work), it is possible that those in extreme poverty get stuck in a perverse equilibrium characterized by low incomes and low nutrition: poor nutrition then becomes both the cause and consequence of poor incomes.
Conceptually, poverty traps can also take place at a collective ‘macro’ level. For example, low-income countries may lack good growth fundamentals (e.g. technology, education and infrastructure, etc.) in order to support high saving rates leading to productivity gains that would be necessary to raise national incomes.
The concept of poverty traps is important in the context of policy, since it implies that one-off policy efforts that make it possible to ‘escape the trap’ have permanent positive effects. This is the rationale often used to argue for ‘big push’ macro policies – such as the expansion of micro-finance in low-income countries. They are meant to trigger a virtuous circle betwen more savings, more investment and economic growth.
For more information, data and analysis on poverty traps check our entry on Global Extreme Poverty
What is Relative Poverty?
People are considered to live in ‘relative poverty’ if their living conditions are below those of a particular group of people at a particular point in time. In most cases, relative poverty is measured with respect to a poverty line that is defined relative to the median income in the corresponding country.
The idea behind measuring poverty in relative terms is that the degree of deprivation depends on the relevant reference group; hence, people are typically considered poor by this standard if they have less income and opportunities than other individuals living in the same society.
Relative poverty can be considered a metric of inequality, since it measures the distance between those in the middle and those at the bottom of the income distribution.
Relative poverty can be measured using the poverty headcount ratio and the poverty gap index. Indeed, these indicators are common in Europe.1
What is Absolute Poverty?
People are considered to live in ‘absolute poverty’ if their living conditions are below a fixed minimum standard of living. Typically, absolute poverty is measured through consumption or income. So people are considered poor if their income or consumption falls below a monetary threshold that is constant across time.
Absolute poverty measures are often used by governments to monitor the evolution of living conditions at the national level. Absolute poverty lines are therefore anchored, so that it is possible to make comparisons relative to a minimum consumption or income level over time.
Absolute poverty measures are also often used to compare poverty between countries. In these cases, the poverty thresholds are held constant both across time and across countries. The International Poverty Line is the best known poverty line for measuring absolute poverty globally.
For more information, data and analysis regarding absolute poverty check our entry on Global Extreme Poverty
What are Randomized Control Trials?
A Randomised Control Trial (RCT) is a technique used to evaluate the causal effect of an intervention, such as a medical treatment or a public policy. RCTs require administering the intervention under evaluation to a random group of individuals (the ‘treatment group’) and assessing the impact by comparing outcomes against another group of individuals who were not affected by the intervention (the ‘control group’).
This is the idea behind medical trials. Today, RCTs have become increasingly popular for research in the social sciences.
You can read more about RCTs in the broader context of policy evaluations from the Abdul Latif Jameel Poverty Action Lab.
What is The Gini Coefficient?
The Gini coefficient – or Gini index – is a measure of the degree of inequality in the distribution of incomes in a population. A Gini coefficient of zero represents a distribution where incomes are perfectly equally distributed. A Gini coefficient of 1 means maximal inequality (one person has all income and all others receive no income).
The Gini coefficient was developed by Italian statistician Corrado Gini (1884-1965) and is named after him.
The following figure illustrates the definition of the Gini index: in a population in which income is perfectly equally distributed, the distribution of incomes are represented by the ‘line of equality’ – 10% of the population would earn 10% of the total income, 20% would earn 20% of the total income and so on.
The ‘Lorenz curve’ shows the income distribution in a population where income is not equally distributed – in the example below you see that the bottom 60% of the population earn 30% of the total income. The Gini coefficient captures the deviation of the Lorenz curve from the ‘line of equality’ by comparing the areas A and B:
Gini = A / (A + B)
This means a Gini coefficient of zero represents a distribution where the Lorenz curve is just the ‘Line of Equality’ and incomes are perfectly equally distributed – a value of 1 means maximal inequality (one person has all income and all others receive no income).