Poverty Gap Index

THE POVERTY GAP index, also known as the poverty gap ratio, is a measure of poverty that calculates both the prevalence and the depth of poverty in a country. It is computed by calculating how far each poor individual is below the official poverty line as a percentage of [Page 844]the poverty line itself, and then averaging these proportional poverty gaps over the total population. Persons above the poverty line are assumed to have a poverty gap of zero. Alternatively the poverty gap index can be calculated by multiplying the percentage of the population below the poverty line (also known as the head-count index) by the average shortfall in income for those persons below the poverty line as a percentage of the poverty line.

For example, suppose a country has 10 million citizens and has a poverty line of $1,000 per year. If one million citizens have incomes below $1,000 per year, and the average income of these one million poor persons is $500, then the headcount index is 10 percent (one million below poverty line divided by 10 million total population). The poverty gap index is five percent (10 percent of the population in poverty multiplied by the average shortfall in income of $500 divided by the poverty line of $1,000, or 50 percent).

As with the headcount index, care must be taken in comparing the poverty gap index across nations since 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 around the world.

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 index for the developing world was 5.9 percent, meaning that total poverty in the developing world was the equivalent of having 5.9 percent of the population earning no income whatsoever. This figure represents a significant decrease from past numbers, largely because of reductions in the poverty gap indexes in India and China. In 1981 and 1990, the poverty gap indexes for the developing world were 14 percent and 8.1 percent, respectively.

A further concern that some economists have with the poverty gap index as a measurement tool is that all persons who fall below the poverty line are treated equally in calculating the index, regardless of how far below the line they fall. Thus a change in the income of an utterly destitute person alters the poverty gap index 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.