Once an aggregate income, consumption or non-monetary measure is defined at the household or individual level, the next step is to define one or more poverty lines. Poverty lines are cut-off points separating the poor from the non-poor. They can be monetary (e.g. a certain level of consumption) or non-monetary (e.g. a certain level of literacy). The use of multiple lines can help in distinguishing different levels of poverty. There are two main ways of setting poverty lines—in a relative or absolute way:
Relative Poverty Lines : These are defined in relation to the overall distribution of income or consumption in a country; for example, the poverty line could be set at 50 percent of the country’s mean income or consumption.
Absolute Poverty Lines: These are anchored in some absolute standard of what households should be able to count on in order to meet their basic needs. For monetary measures, these absolute poverty lines are often based on estimates of the cost of basic food needs (i.e., the cost a nutritional basket considered minimal for the healthy survival of a typical family), to which a provision is added for non-food needs. For developing countries, considering the fact that large shares of the population survive with the bare minimum or less, it is often more relevant to rely on an absolute rather than a relative poverty line.
The food-energy intake method defines the poverty line by finding the consumption expenditures or income level at which a person’s typical food energy intake is just sufficient to meet a predetermined food energy requirement. If applied to different regions within the same country, the underlying food consumption pattern of the population group just consuming the necessary nutrient amounts will vary. This method can thus yield differentials in poverty lines in excess of the cost-of-living differential facing the poor.
Incidence of Poverty (Headcount Index) : This is the share of the population whose income or consumption is below the poverty line, that is, the share of the population that cannot afford to buy a basic basket of goods. An analyst using several poverty lines, say one for poverty and one for extreme poverty, can estimate the incidence of both poverty and extreme poverty. For non-monetary indicators, similarly, the incidence of poverty measures the share of the population which does not reach the defined threshold (e.g. percentage of the population with less than 3 years of education).
Depth of Poverty (Poverty Gap) : This provides information regarding how far off households are from the poverty line. This measure captures the mean aggregate income or consumption shortfall relative to the poverty line across the whole population. It is obtained by adding up all the shortfalls of the poor (considering the non-poor has having a shortfall of zero) and dividing the total by the population. Put differently, it gives the total resources needed to bring all the poor to the level of the poverty line (divided by the number of individuals in the population).
This measure can also be used for non-monetary indicators, provided that the measure of the distance is meaningful. The poverty gap in education could be the ‘number of years of education missing to reach the defined threshold’. In some cases, though, the measure does not make sense or is not quantifiable (e.g. when indicators are binary, such as literacy, in which case only the concept of the headcount can be used). Note also that, the poverty gap can be used as a measure of the ‘minimum amount of resources necessary to eradicate poverty’, that is, the amount that one would have to transfer to the poor under perfect targeting (i.e. each poor getting exactly the amount he/she needs to be lifted out of poverty) to bring them all out of poverty.
Poverty Severity (Squared Poverty Gap) : This takes into account not only the distance separating the poor from the poverty line (the poverty gap), but also the inequality among the poor. That is, a higher weight is placed on those households who are further away from the poverty line. As for the poverty gap measure, limitations apply to some non-monetary indicators.
