Poverty line

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The poverty line is the level of income below which one cannot afford to purchase all the resources one requires to live. People who have an income below the poverty line have no discretionary disposable income, by definition.

It is widely discussed how and where to set the poverty line. In practice, different countries often use different poverty lines. Globally, however, it is more common to use only one poverty line in order to compare economic welfare levels. When comparing poverty across countries, the purchasing power parity exchange rates are used. These are used because poverty levels otherwise would change with the normal exchange rates. Thus, 'living for under $1 a day' should be understood as having a daily total consumption of goods and services comparable to the amount of goods and services that can be bought in the US for $1. Self-produced goods and public services are included in this measure.

Almost all societies have some of their citizens living in poverty. The poverty line is useful as an economic tool with which to measure such people and consider socioeconomic reforms such as welfare and unemployment insurance to reduce poverty.

Determining the poverty line is usually done by finding the total cost of all the essential resources that an average human adult consumes in one year. This approach is needs-based in that an assessment is made of the minimum expenditure needed to maintain a tolerable life. This was the original basis of the poverty line in the United States, whose poverty line has since been raised due to inflation. In developing countries, the most expensive of these resources is typically the rent required to live in an apartment. Economists thus pay particular attention to the real estate market and housing prices because of their strong influence on the poverty line.

Individual factors are often used to handle various circumstances, such as whether one is a parent, elderly, a child, married, etc.


Problems with using a poverty line

Using a poverty line is problematic because having an income marginally above it is not substantially different from having an income marginally below it: the negative effects of poverty tend to be continuous rather than discrete, and the same low income affects different people in different ways. To overcome this poverty indexes are sometimes used instead; see income inequality metrics.

A poverty line relies on a quantitative, or purely numbers based measure of income. If other human development-indicators like health and education shall be used, they must be quantified, not a simple or even achievable task.

Defining poverty lines

Poverty lines can be defined in different ways:

  • Social Security benefit based. If a government guarantees to make income up to some particular level then it may be presumed that that level is the poverty line. This is a problematic definition, because a stingy government may reduce the guaranteed income, thus reducing the incidence of poverty so defined while increasing the incidence of actual poverty.
  • A relative income line, related to some fraction of typical incomes. This excludes the wealthiest individuals from the calculation. For example, the OECD and the European Union uses 60% of national median equivalised household income.
  • A relative figure fixed in time and only adjusted for inflation - thus avoiding the possibility that if income inequality increases, then poverty may otherwise also increase.
  • When the World Bank calculates its "$1 a day" statistics, it uses a poverty line.

Absolute poverty

A measure of absolute poverty quantifies the number of people below a poverty line, and this poverty line is thought to be independent of time and place. For the measure to be absolute, the line must be the same in different countries. Also, it does not change when the income distribution change. This is only possible when all consumed goods and services are counted and when PPP-exchange rates are used (see purchasing power parity). The intuition behind an absolute measure is that mere survival takes the same amount of good across the world and that everybody should be subject to the same standards. Notice that if everyone's income in an economy increases, and the income distribution does not change, absolute poverty will decline.

Furthermore, the rate of absolute poverty can decline even though inequality is increasing - as long as the poorest get a higher income than they had before.

This type of measure is often contrasted with measures of relative poverty (see below), which classify entities as "poor" not by comparing them to a fixed cutoff point, but by comparing them to others in the population under study. (The term absolute poverty is also sometimes used as a synonym for extreme poverty.)

Relative poverty

A measure of relative poverty definines "poverty" as being below some relative poverty line. An example is when poverty is defined as households who earn less than 25% of the median income is a measure of relative poverty. Notice that if everyone's income in an economy increases, but the income distribution stays the same, relative poverty will also stay the same.

Measures of relative poverty are almost the same as measuring inequality: If a society gets a more equal income distribution, relative poverty will fall. Some take this further, arguing that the term 'Relative Poverty' is itself misleading and that 'Inequality' should be used instead; pointing out that if some catastrophe should happen to strike in a way that affected high earners more than low earners, then it would be possible for every citizen of that society to be worse off but 'Relative Poverty' would have decreased.

The phrase relative poverty can also be used in a different sense to mean "moderate poverty". For example, a standard of living or level of income which is higher than what is needed to satisfy basic needs (like water, food, clothing, shelter, and basic health care), but which is still significantly lower than that of the majority of the population under consideration.

External links


Ray, Debraj 1998, Development Economics, Princeton University Press, ISBN 0691017069.

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