Income

Measuring Poverty Using Income

Income is often used to define thresholds that define whether a household is considered in poverty. These income thresholds are known as poverty lines and can be estimated in two ways. The standard food basket variant determines a poverty line by first calculating the cost for a household of a certain size to meet its basic nutritional requirements and then multiplying this figure by the percentage of household income spent on food to set the poverty threshold. The standard food basket variant is used by many countries, including the United States, to set the official poverty line.

The poverty line can also be set using a relative income standard, which fixes the poverty line as some fraction of the average income of a country or region. For example, in calculating the Human Poverty Index, the United Nations Development Program (UNDP) defines a country's poverty line as 50 percent of the median income level for that country. Similarly, the European Union defines poverty in its member countries as 60 percent of national median income.

Using household income and poverty lines, the prevalence of poverty in a region can be estimated by calculating the percentage of households whose annual income falls below the designated poverty threshold. This percentage is known as the headcount index or the poverty rate. The depth of poverty can be determined by how far below the poverty line the typical poor household falls, a statistic known as the poverty gap or poverty gap index.

Creating comparisons in poverty rates can be tricky because of inflation and international divergences in the cost of living as well as differences in the way in which the poverty line is set in various countries. For example in the United States in 2003, the official poverty line for a single American was an annual income of roughly $9,400 while the corresponding figure for Mexico was roughly $400.

International agencies have attempted to standardize definitions of what constitutes poverty by using the $1-a-day definition of absolute poverty, which corresponds to an annual income of $365 adjusted for inflation and international differences in costs of living (also known as purchasing power parity, or PPP). By the $1-a-day threshold, the poverty rate for the developing world was 20.6 percent in 2001, corresponding to just under one billion persons in poverty. These figures represent significant decreases from past numbers largely due to declining poverty rates in India and China. In 1981 and 1990, the headcount indexes for the developing world were 40.7 and 27.9 percent, respectively; however, because of population growth, the total number of persons below the $1-a-day threshold has declined much less rapidly, falling from 1.40 billion in 1981 to 1.14 billion in 1990.

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