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Berkeley A,RESEC C253 - Positive analysis - Indicators and determinant

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-1-9/22/03PP253/ARE253 Alain de Janvry & Elisabeth SadouletFall 2003Positive analysis: Indicators and determinantsObjectives of this class:(1) Acquire the tools necessary to prepare a country poverty assessment for the World Bank or to assist acountry in developing a PRSP (Poverty Reduction Strategy Paper) for debt reduction.(2) Construct and measure an indicator of standard of living that is both rigorous and simple to use by policy-makers. Use this indicator to compare poverty between groups, countries and regions, over time, and beforeand after a policy change.Technical issues: (1) How to measure welfare?(2) How to separate poor from non-poor: choice of a poverty line?(3) How to aggregate into a poverty indicator?1. Measuring welfare: Choice of individual welfare measure y (Ravallion, EJ 1996)∑ What data (y) to use to measure welfare? Income vs expenditure:Total consumption expenditure per household during the period.Advantage over income: easier to measure; more stable due to smoothing and closer to permanentincome.Limitations:Generally not available for individuals.Large measurement errors.Varies with tastes: difficult to use for inter-personal comparisons.∑ Need adjust y for- Changes in prices for comparisons over time: what deflators to calculate real expenditures?- Spatial price differences for regional/country comparisons: PPP-adjusted e across countries; CPI-adjusted across regions or urban/rural- Need include all commodities consumed, both bought and home produced: valued at what price?- Need account in y for the imputed value of public goods and services received (e.g., free orsubsidized health care, school lunches, public education). (e.g., Ghana: poverty fell according toWB Poverty Assessment; poverty rose according to NGO. Decline in access to public goods notmeasured by income poverty in WB report.)∑ Household vs individual- Calculate per capita consumption.- Adult equivalence scales, to take into account differences in demographic composition forcomparison across households.Example: age-adjusted family size nwnkkk*=Â, wk= 1 male adults, wk< 1 other members,where nk and wk are number of members and weight of demographic category k.These weights are established by regression of consumption on demographic structure of the household- Need allow for the existence of economies of scale in consumption in calculating per capita welfaredue to household-level public goods (housing, durables, heating, electricity) versus private goods(food, child education).Total household income (consumption): YC pCfhh=+0Per capita income (or consumption): yCnpCnfhh*=+0bCh = fixed (short run) quantity of housing consumed (quasi-public good)Cf = consumption of food (private good),ph0 = initial prices of housing (food price as numeraire). n = number of household membersb = degree of “privateness” of the good:b = 0, pure public good, b = 1, pure private good.2. Measuring poverty2.1. Poverty line∑ Absolute poverty line: Calorie-based procedureAbsolute or extreme poverty or indigence: zabs = cost of recommended minimum food caloric intake. “Normal” poverty line: z = income level necessary to consume the recommended minimum food caloricintake (Figure 1)Food expendituresyCalories2000ca/day/adultzIncome to consume 2000caFood expendituresNon-food expendituresBudget constraintEngel curveCalorie expenditure functionzabszabsFigure 1. Nutrition-based poverty line∑ Relative poverty line (a measure of inequality)Fixed % of population declared poor.Poverty relative to mean income: zky=, constant percentage of mean expenditure or income y.e.g., Atkinson for Europe, k = 0.5; hardcore poverty, k = 0.33.∑ International comparisons (World Bank: World Development Indicators):z = 1 PPP-adjusted$/day per capita (also 2$).PPP income = income/PPP exchange ratePPP exchange rate = number of LCU to buy the same amount of quality adjusted goods and servicesas 1$ in the United States.∑ Locally defined poverty line, based on lifestyle (used in most individual country analyses): minimumincome needed to “make it”.Important: Use a consistent z in making comparisons. Use more than one definition of poverty line andlook at consistency in orderings.2.2. Describing poverty: Poverty profile (Figure 2) and correlates of povertyPoverty profile-2-9/22/03Define: q = number of individuals below poverty linez = poverty linen = population sizeyi = income (or consumption expenditure) of individual with income rank i.yqnPoverty gapHouseholds ranked by income levelziz - yiyiy100Cumulative percentage of the populationzH(y)Poverty profile Poverty incidence curveFigure 2. Poverty profile and poverty incidence curveCorrelates of poverty: no pretense of causalityCorrelates can be endogenous variables: activity (choice of crops, type of employment),dependency ratio, location and neighborhood effects (e.g., what other households in the same socialnetwork do), ethnicity, gender, use of credit, etc.2.3. Most commonly used indicators of povertyAll based on the distribution of income (y) truncated at z.General desirable properties of a welfare index:- Monotonocity (Sen). A decrease in y of a poor person should increase the index.- Transfer (Sen). An y transfer from a poorer poor to a richer poor should increase the index.- Transfer sensitivity. The rise in the index declines as the y transfer from poor to rich is taken from a richerpoor.Specific desirable properties of a poverty index:- Population symmetry. If two identical populations are pooled, the index should not change.- Proportion of poor. If the share of poor increases, the index should increase.- Focus (Sen). The index is independent of the y level of people above z.- Decomposability. If the poverty of a subgroup increases, the index increases.∑ Members of the Pa class (Foster-Geer-Thorbecke (FGT) index)i) General index: Pnzyzzyzfydyiiqzaaa=-Êˈ¯=-Êˈ¯()=ÂÚ110.ii) If a = 0, Pqn0=: headcount ratio or incidence of poverty: % of poor in the population.(P0 does not satisfy the monotonicity and transfers axioms. Yet, it is the most widely used povertyindex.)iii) If a = 1, PnzyzqnzyzPIiiqp1101=-Êˈ¯=-ÊËÁˆ¯˜==Â: poverty gap index or depth of poverty, whereyqypiq=Â11, average income of the poor,Izyzp=-, average income gap ratio,zyiq-()Â1 = total income deficit of the poor = cost to eliminate poverty with perfect targeting,nz = cost of eliminating poverty without targeting.Pzynziq11=-()Â


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Berkeley A,RESEC C253 - Positive analysis - Indicators and determinant

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