CHAPTER 3

POVERTY, INEQUALITY,
VULNERABILITY AND
DEVELOPMENT
 2

CONTENTS
3.1. Inequality
3.2. Poverty
3.3. Poverty, Inequality, and Development
3.4. Vulnerability and Development
3.1. INEQUALITY
3.1.1. SOCIAL INEQUALITY
3.1.2. INCOME DISTRIBUTION
3.1.3. MEASURING INEQUALITY
3.1.1. SOCIAL INEQUALITY
DEFINITION:
Social inequality
refers to the unequal
distribution of
resources,
opportunities, and
power within a
society, (WB, 2024)
3.1.2. INCOME DISTRIBUTION 6

- Personal distribution of income (size distribution of income)

The distribution of income according to size class of persons—
for example, the share of total income accruing to the poorest
specific percentage or the richest specific percentage of a
population—without regard to the sources of that income.
- Quintile: A 20% proportion of any numerical quantity. A
population divided into quintiles would be divided into five
groups of equal size.
- Decile: A 10% portion of any numerical quantity; a population
divided into deciles would be divided into ten equal numerical
groups.
- Income inequality: The disproportionate distribution of total
national income among households.
7
3.1.3. INEQUALITY MEASUREMENTS
1. Lorenz curves 8

- A graph depicting the variance of the size

distribution of income from perfect equality.
- The number of income recipients are plotted
on the horizontal axis, not in absolute terms
but in cumulative percentages.
- The diagonal line represents ‘perfect
equality’ in size distribution of income,
because the percentage of income received is
exactly equal to the percentage of income
recipients at every point on this line.
- The Lorenz curve shows the actual
quantitative relationship between the
percentage of income recipients and the
percentage of the total income they received
during a given year.
1. Lorenz curves (cont): 9
- The more the Lorenz line curves away
from the diagonal, the greater the degree
of inequality represented.
- The greater the degree of inequality, the
greater the bend and the closer to the
bottom horizontal axis the Lorenz curve
will be.
- The extreme case of perfect inequality
would be represented by the congruence of
the Lorenz curve with the bottom
horizontal and right-hand vertical axes.
2. Gini coefficients and Aggregate Measures 10

of Inequality:
- An aggregate numerical measure of income
inequality ranging from 0 (perfect equality)
to 1 (perfect inequality).
- It is measured graphically by dividing the
area between the perfect equality line and
the Lorenz curve by the total area lying to
the right of the equality line in a Lorenz
diagram.
- The higher the value of the coefficient, the
higher the inequality of income distribution;
the lower it is, the more equal the
distribution of income.
The Gini coefficient is among a class of measures that satisfy
four highly desirable properties: the anonymity, scale 11
independence, population independence, and transfer principles.
+ The anonymity principle simply means that our measure of
inequality should not depend on who has the higher income; for
example, it should not depend on whether we believe the rich or
the poor to be good or bad people.
+ The scale independence principle means that our measure of
inequality should not depend on the size of the economy or the
way we measure its income.
+ The population independence principle states that the
measure of inequality should not be based on the number of
income recipients.
+ The transfer principle (sometimes called the Pigou-Dalton
principle) states that, holding all other incomes constant, if we
transfer some income from a richer person to a poorer person
(but not so much that the poorer person is now richer than the
originally rich person), the resulting new income distribution is
more equal.
 3.2. POVERTY 12

- In general terms, people live in poverty when they experience

well-being below some minimally acceptable level.
- The poverty line is the value of the selected well-being indicator
that marks the minimally acceptable level, below which people
merit special policy attention.
A. Absolute poverty: The situation of being unable or only barely
able to meet the subsistence essentials of food, clothing, and shelter.
- People are identified as living in relative poverty when their
living standards are low relative to the typical level in their
society.
 Choice of formulas for aggregating measures
3.2. POVERTY across households
13

- to aggregate poverty measures for many individuals into a

single measure:
+ The person’s well-being = Y;
+ Ordering N individuals in the population from 1 st (the
poorest) to Nth (the richest)
+ the upward-sloping curve (Y) = the income, the average
height = the average level of per capita household income;
+ the curve’s slope shows how rapidly incomes rise from the
poorest to richest and how unequally income is distributed in
this population.
+ the minimal acceptable level of per capita of z equals to the
person q -> q people are poor and (N-q) are nonpoor.
+ the vertical distance z−Yi, is called person i’s
income gap, and is a measure of the depth of
that person’s poverty in units of income.
 Choice of formulas for aggregating measures
3.2. POVERTY across households
14

+ the person i’s proportional income gap =

(z−Yi)/z
If this number = 0.3 tells us the person’s income falls 30%
below the poverty line.
+ The most commonly cited poverty statistics is Headcount
ratio (H); H = q/N -> shows how widespread poverty is
within the population.
+ the Y curve turns down much more steeply to the left of q,
indicating deeper poverty among the poor, while q and N are
unchanged.
+ Total income gap (TYG) is the total amount of money
that would be required to bring every poor person’s income
up to the poverty line (The shaded area below z line and
above Y curve)
TYG = -> shows how costly to eliminate poverty.
 Choice of formulas for aggregating measures across households 15
3.2. POVERTY + The average proportional income gap APYG is just the simple
average over all the poor of their proportional income gaps: APYG =
(1/q)
An APYG of 0.35 means that, on average, the incomes of the poor fall
short of the poverty line by 35 percent.
+ The poverty gap index PG averages proportional income gaps
across everyone in the population (poor and nonpoor), treating the
nonpoor as having income gaps of zero:
PG = (1/N) (1); PG =(q/N) (1/q) =H*APYG (2)
(1): The PG can be interpreted as the cost per person in the entire
economy of eliminating poverty, expressed as a share of the poverty
line.
A PG of 0.05 indicates that bringing the incomes of the poor up to the
poverty line would require a per capita expenditure of 5 percent of the
poverty line.
(2): the PG picks up variation across countries or over
time in both the prevalence of poverty and its average
 16
3.2. POVERTY
Choice of formulas for aggregating measures across
households
+ the squared proportional income gap index: A measure
that is sensitive not only to the overall prevalence and
average depth of poverty but also to the prevalence of deep
poverty among the poor
Squared proportional income gap index = P2 = (1/N)
The effect of the squaring is to magnify the
contributions to the overall measure of the
income deficits (shorts) experienced by those
in deepest poverty. FX: someone whose income
is 10 percent below the poverty line adds 0.01
to the overall measure, someone whose
income is 50 percent below the poverty line
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 3.2. POVERTY 18

B. Multidimensional poverty
measurement:
The
global Multidimensional Poverty Inde
x
(global MPI) is a poverty measure
that reflects the multiple deprivations
that poor people face in the areas of
education, health, and living
standards, (MPPN, 2024)
Global dimensions and indicators:
3.3. POVERTY, INEQUALITY AND
DEVELOPMENT
- Social welfare depends positively on the level of income per capita
but negatively on poverty and negatively on the level of inequality:
+ Extreme income inequality leads to economic inefficiency, the higher
the inequality, the smaller the fraction of the population that qualifies
for a loan or other credit due to lack of collateral-> lower education,
lower saving, etc. Inequality may lead to an inefficient allocation of
assets;
+ Extreme income disparities undermine social stability and solidarity:
high inequality strengthens the political power of the rich and hence
their economic bargaining power -> facilitating rent seeking;
+ Extreme inequality is generally viewed as unfair
W = W(Y, I, P), where W is social welfare; Y is income per
capita(positively); I is inequality (negatively); P is absolute poverty
(negatively).
3.3. POVERTY, INEQUALITY AND
DEVELOPMENT

- Kuznets’ inverted-U curve:

A graph reflecting the
relationship between a
country’s income per
capita and its inequality of
income distribution, which
is explained by Lewis
model.
3.4. VULNERABILITY AND DEVELOPMENT

Vulnerability to poverty refers to the likelihood that a

household or an individual may fall below the poverty line
in the event of an economic shock, or natural disasters (WB,
2020).
- Increased economic growth is more likely to reduce
vulnerability to destitution by creating assets that reduce
inherent risks of crop loss or ill health, or facilitating the
development of market relationship.
THE END