Why We Need to Measure Poverty

Human beings need a certain minimum consumption of food and non-food items to survive. However, the perception regarding what constitutes poverty varies over time and across countries. Nevertheless, there is need for a measure of poverty. Only then, it will be possible to evaluate how the economy is performing in terms of providing a certain minimum standard of living to all its citizens. Measurement of Poverty has, therefore, important policy implications.

According to the World Bank, to compute a poverty measure, three ingredients are needed:

• One has to define the relevant welfare measure
• One has to select a poverty line – that is a threshold below which a given household or individual will be classified as poor.
• One has to select a poverty indicator– which is used for reporting for the population as a whole or for a population sub-group only

Consumption Vs. Income: Consumption is considered as a better indicator for poverty measurement than income for the following reasons:

• Consumption is a better outcome indicator than income: Actual consumption is more closely related to a person’s well-being in the sense of having enough to meet current basic needs. Income is only one of the elements which will allow consumption of goods (others include questions of access, availability, etc.).
• Consumption may be better measured than income: In poor agrarian economies and in urban economies with large informal sectors, income flows may be erratic and fluctuate during the year. For farmers, one added difficulty in estimating income consists in excluding the inputs purchased for agricultural production from the farmer’s revenues. Finally, large shares of income are not monetized if households consume their own production or exchange it for some other goods, and it might be difficult to price these. Estimating consumption has its own difficulties, but it may be more reliable if the consumption module in the household survey has been well designed.
• Consumption may better reflect a household’s ability to meet basic needs: Consumption expenditures reflect not only the goods and services that a household can command based on its current income, but also whether that household can access credit markets or household savings at times when current income is low or even negative, due perhaps to seasonal variation or harvest failure. Consumption can therefore provide a better picture of actual standards of living than current income, especially when income fluctuates a lot.