Consumption-Based Measures of Poverty

CONSUMPTION-BASED measures of poverty are a class of poverty indicators that use consumption as a measure of individual welfare. A poverty measurer can [Page 204]be described in terms of three main characteristics: a measure of individual welfare; a poverty line, that is, a threshold for the welfare measure below which an individual is classified as poor; and a summary statistic, for instance the proportion of the population below the poverty line (headcount ratio). Consumption and income are the most common measures of individual well-being that have been used to obtain poverty indicators.

Household surveys typically contain information on household expenditure for several product categories. However, household expenditure is a satisfactory measure of living standards only if everyone faces the same prices and everyone lives in households with the same size and composition. In most cases we observe households of different sizes living across regions or neighborhoods with different prices. Therefore, we have to make some adjustments to obtain a proper con-sumption-based welfare measure.

Two measures are the most commonly used to adjust for differences in prices: the money metric utility, proposed by P.A. Samuelson, and the welfare ratio, based on C. Blackorby and D. Donaldson. A. Deaton and S. Zaidi provide a discussion of the theoretical foundations and the practical implementation of these two measures.

Adjustments are necessary to get a consumption-based measure of standard of living. For instance, it is very common that rural households should invest part of their income into agricultural production inputs such as fertilizer, water, or seed. These expenditures should not be considered as household consumption but as investments. Otherwise we would overstate the actual welfare levels achieved by households. Deaton and Zaidi describe other types of adjustments for durable goods, rationing, public goods, and leisure.