Poverty Gap

THE POVERTY GAP IS the difference between the poverty line and the actual income of all households below the poverty line in a country. In other words, the poverty gap is the total amount of money that would be required to bring all of a country's poor up to the poverty line. The term can also be applied to the difference between the poverty line and the actual income of a single individual or household. The poverty gap differs from the commonly used statistic of the headcount index, which simply measures the proportion of the population below the official poverty line, in that it measures not just the prevalence of poverty but also the depth of poverty. The poverty gap index is a related statistic that measures the shortfall between the poverty line and actual income averaged over the entire population.

As with the headcount index, care must be taken in comparing poverty gaps across nations. First, countries with bigger populations will tend to have larger poverty gaps since the poverty gap is a gross measure of the income required to bring an entire population up to a certain income standard. In addition the official definition of poverty may differ significantly from country to country. International agencies have attempted to correct for this deficiency by standardizing definitions of what constitutes poverty.

The most commonly used standardized measure of poverty is the $1-a-day level, 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 gap for the developing world was $111 billion in 2001, meaning that $111 billion in annual income would be required to bring all persons in the developing world up to a daily income of at least $1. This figure represents a significant decrease from past numbers largely because of declining poverty gaps in India and China. In 1981 and 1990, the poverty gaps for the developing world were $189 billion and $129 billion, respectively; however, because of population growth the world poverty gap has fallen less rapidly than the world headcount index.

A further concern that some economists have with the poverty gap as a measurement tool is that all persons who fall below the poverty line are treated equally in measuring the poverty gap, regardless of how far below the line they fall. Thus a change in the income of an utterly destitute person alters the poverty gap equally to a change in income for someone just below the poverty line cutoff. For this reason, some economists advocate the use of the squared poverty gap index to account for variations in income below the poverty line.

While not under the definition generally accepted by economists, the term poverty gap is also commonly used to refer simply to the difference between the incomes of the poor and the rich. Because under such a definition the poverty gap may widen even as the poor increase their incomes, if income growth among the poor is slower than that of the rich, the use of this definition of the poverty gap as a general measure of wellbeing is problematic.

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