Question

Assume that the poverty line is given as $2 a day. Use the information in Table 1 below to answer the following questions.

Table 1: Income Distribution in three countries

Individual	Country A	Country B	Country C
1	1.90	1.90	4.75
2	3.50	1.10	6.50
3	1.50	2.15	1.20
4	1.90	11.0	4.20
5	4.00	1.20	0.10
6	1.80	1.65	0.20
7	3.20	0.40	2.20
8	0.80	3.89	2.50
9	2.01	1.50	2.50
10	1.90	1.10	1.00
11	1.45	1.80	4.00
12	1.50	2.95	0.40

i. Calculate the headcount Index (Q) for Country A, Country B and Country C.

ii. Assume you are a policymaker and the headcount index (Q) is the only measure of poverty available to you. Based on your calculations in (i), will your policies to combat poverty in country A differ from that of country B?

iii. Calculate the Total Poverty Gap (TPG) for Country A, Country B, and Country C?

iv.  Suppose that you now have new information regarding the TPG for the three countries as computed in (iii). With this new information at hand, as policymaker will your policy stance in (Q.2) change? Briefly explain your answer.

v. Calculate the following for each country
(a) Average poverty Gap
(b) Normalized poverty Gap
(c) Average income shortfall

Answer 1

TABLE 1

i.

The headcount ratio is the ratio of the number of people below the poverty line. If the number of people below the poverty line is H and the total population is N. Then the headcount ratio is

In the table below the highlighted cell gives the number of people having income less than $2. In country A the number is 8, while in B is also 8 and inC the number of poor people is 5. The corresponding HCR is computed in the table above.

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ii.

As the total population and the number of people below the poverty line is the same, the HCR for country A and B is the same. Then the policy to be adopted solely based on HCR will be the same for A and B.

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iii.

The total poverty gap (TPG) is the amount of total income that is necessary to lift every poor person in the economy at least to the poverty line. If the poverty line is defined as Yp and the income of an ith poor person is Yi, then

The poverty gap is calculated in column 5th, 6th and 7th for country A, B, and C respectively.

• TPG(A)=3.25
• TPG(B)=5.35
• TPG(C)=7.1

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iv.

With the information in TPG, the total income needed to lift every person from poverty is greater in country B than it is in A. Then the policy stance will be different in this case than with only information about HCR.

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v.

• a) APG=TPG/N
• b)NPG=APG/Yp
• c)AIS=TPG/H

All of these are calculated in the table above for each country.