Unit Economic Development

Module Poverty, Inequality, and Development

AE12-ED ECONOMIC DEVELOPMENT Units: 3 Page |1

INFORMATION SHEET PR-6.1.7

“Poverty, Inequality, and Development

Measuring Inequality

Economists usually distinguish between two principal measures of income distribution for both
analytical and quantitative purposes: the personal or size distribution of income and the functional or
distributive factor od share distribution.

Size Distributions. The personal or size distribution of income is the measure most commonly used by
economists. It simply deals with individual persons or households and the total income they receive.
Economists and statisticians therefore like to arrange all individuals by ascending personal incomes and
then divide the total population into district groups or sizes.

A common method is to divide the population into successive quintiles (fifths) or deciles (tenths)
according to ascending income levels and then determine what proportion of the total national income
is received by each income group.

Kuznets ratio is often used as a measure of the degree of inequality between high- and low-income
group

Figure 1. Typical Size Distribution of Personal Income in a Developing Countries by Income Shares –
Quintiles and Deciles.

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 Unit Economic Development
Module Poverty, Inequality, and Development
AE12-ED ECONOMIC DEVELOPMENT Units: 3 Page |2

Lorenz Curves. Another common way to analyze personal income statistics is to construct what is
known as Lorenz curve. The Lorenz curves the actual quantitative relationship between the percentage
of income recipients and the percentage of the total income they receive during the year.

Figure 1 The Lorenz Curve

Gini Coefficients and Aggregate Measures of Inequality. A final and very convenient shorthand
summary measure of the relative degree of income inequality in a county can be obtained by calculating
the ratio of the area between diagonal and the Lorenz curve divided by the total area of the half-square
in which the curves lies.

Figure 2 Curvature of the Lorenz Line

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Module Poverty, Inequality, and Development
AE12-ED ECONOMIC DEVELOPMENT Units: 3 Page |3

Figure 3. This ratio is known as the Gini concentration ratio or Gini coefficient, named after the Italian
statistician who first formulated it in 1912.

Functional Distributions . The second common measure of income distribution used by economists, the
functional or factor distribution of income, attempts to explain the share of the total national income of
the factors of production ( land,labor, and capital)

Figure 4 Four Possible Lorenz Curve

Measuring Absolute Poverty

Absolute Poverty as the number of people who are unable to command sufficient resources to satisfy
their needs. It may be measured by the number, or “headcount”, H 2 of those whose incomes fall below
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Module Poverty, Inequality, and Development
AE12-ED ECONOMIC DEVELOPMENT Units: 3 Page |4

the absolute poverty line Yp when headcount is take a fraction of the total population, N-headcount
index. H/N. the poverty line is set at a level that remains constant in real terms so that we can chart our
progress on absolute level overtime.

Total Poverty Gap (TPG) – measures the total amount of income necessary to raise everyone who is
below the poverty line up to the line.
Where: APG – Average Poverty Gap
APG = TPG / N TPG – Total poverty Gap
N - total population

The Foster-Greer-Thorbecke Measure. Also often interested in the degree of income inequality among
the poor, such as Gini coefficients among those who are poor, Gp1 or the coefficient of variation (CV) of
income among the poor. CVp.

There are criteria for a desirable poverty measure that are widely accepted by development economists:
1. Anonymity are very similar to the properties for inequality indexes
2. Population independence
3. Monotonicity, and - means that if you add income to someone below the poverty line, all other
incomes held constant, poverty can be no higher than it was.
4.Distributional sensitivity principles. – other things being equal, if you transfer income from a poor
person to a richer person ,the resulting economy should be deemed strictly poorer.

Human Poverty Index. The United Nations Development Program (UNDP) argued that human poverty
should be measured in terms of three key deprivations…( survival, knowledge and economic provisions).
1. Of life (over 30% of people in the least developed countries to live beyond40 years of age)
2. Basic Education ( as measured by the percentage of adults who are illiterate)
3. Economic provisioning ( measured by the percentage of people without access to health
services and safe water plus the percentage of children under 5 who are underweight.

A final approach to accounting for the distribution of income in assessing the quality of growth is to
value increses in income for all individuals, but to assign a higher weight to income gains by lower-
income individuals than to gains by higher-income individuals.

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Module Poverty, Inequality, and Development
AE12-ED ECONOMIC DEVELOPMENT Units: 3 Page |5

DUALISTIC DEVELOPMENT AND SHIFTING LORENZ CURVE SOME STYLIZED TYPOLOGIES

Gary Fields, an economists demonstrates how Lorenz curves can be used to analyze three limiting cases
of dualistic development.

1. Modern Sector Enlargement –economy develops by enlarging the size of its modern sector
while maintain constant wages in both sectors.
Explanation:
 Absolute incomes rise and absolute poverty is reduced, but the Lorenz curve will always cross
so that we cannot make any unambiguous statement about changes in relative inequality.
2. Modern Sector Enrichment - economy grows but such growth is limited to a fixed number of
people in the modern sector.
Explanation
• Growth results in higher incomes, a less equal relative distribution of income, and no change
in poverty. The Lorenz curve to shift downward and farther from the line of equality.
3. Traditional Sector Enrichment – growth are divided among traditional-sector workers, with
little or its growth occurring in the modern sector
Explanation
• Growth results in higher income, a more equal relative distribution of income, and less
poverty. Traditional sector enrichment growth causes the Lorenz curve to shift uniformly
upward and closer toward the line of equality.

Growth and Poverty

There are at least five reasons why policies focused toward reducing poverty levels need not lead to a
slower rate of growth.

1. Widespread poverty creates conditions in which the poor have no access to credit, are unable to
finance their children’s education, and, in the absence of physical or monetary opportunities,
have many children as a source of old-age financial security.
2. The rich in contemporary poor countries are generally not noted for their frugality or for their
desire to save and invest substantial proportions of their incomes in the local economy.
3. The low incomes and low levels of living for the poor, which are manifested in poor health,
nutrition, and education, can lower their economic productivity and thereby lead directly and
indirectly to a slower-growing economy.
4. Raising the income levels of the poor will stimulate an overall increase in the demand for locally
produced necessity products like food and clothing, whereas the rich tend to spend more of
their additional incomes on imported luxury goods.

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Module Poverty, Inequality, and Development
AE12-ED ECONOMIC DEVELOPMENT Units: 3 Page |6

Rural Poverty. They are primarily engaged in agricultural and associated activities, that they are more
likely to be women and children than adult males, and that they are often concentrated among minority
ethnic groups and indigenous peoples.

Women and Poverty . Women make up a substantial majority of the world’s poor.
 Virtually everywhere, women and children experience the harshest deprivation.
They are more likely to be poor and malnourished and less likely to receive medical services,
clean water, sanitation, and other benefits
 Woman have less access to education, formal sector employment, social security, and
government employment program.
 Legislation and social custom often prohibit women from owning property or signing financial
contracts without a husband’s signature and women are typically ineligible for institutionally
provided resources such as credit and training.
 The favor shown toward boys in part reflects the fact that men perceived to have a greater
potential for contributing financially to family survival.
 Women’s control over household income and resources is limited for a number of reasons. It
may also be constrained by the fact that many women from poor households are not paid for
the work they perform in family agriculture or business.
 In the long run, the low status of women is likely to translate into slower rates of economic
growth. Human capital is perhaps the most important prerequisite for growth, education and
enhanced economic status for women are critical to meeting long-term development
objectives.

The Range of Policy Options: Some Basic Considerations

Developing countries that aim to reduce poverty and excessive inequalities in the distribution of
income need to know how best to achieve their aim.

Developing-country governments have many options and alternative possible policies to operate in
the four broad areas of intervention.
1. Altering the Functional Distribution of Income through Policies Designed to Change Relative
Factor Prices.
2. Modifying the Size Distribution through Progressive Redistribution of Asset Ownership
3. Reducing the Size Distribution at the Upper Levels through Progressive Income and wealth Taxes
4. Direct Transfer Payments and the Public Provision of Good and Services.

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 Unit Economic Development
Module Poverty, Inequality, and Development
AE12-ED ECONOMIC DEVELOPMENT Units: 3 Page |7

 Self-Assessment

Guide Question Yes No

1. Can I express the problems and Policies of poverty, inequality and
development?
2. Can I define the measuring inequality and poverty?
3. Can I identify the relationship of Lorenz curve and Gini coefficient?
4. Can I identify the dualistic development?
5. Can I express the range of policy options and some basic consideration?

Reference Book: An Introduction to Economic Development

By: Michael P. Todaro
Stephen C. Smith
Ninth Edition 2006
Pearson Education South Asia

Business Economics
By: Milagros A. Cruz
CopyRight @2017
Anvil Publishing, Inc.

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 Unit Economic Development
Module Poverty, Inequality, and Development
AE12-ED ECONOMIC DEVELOPMENT Units: 3 Page |8

STUDENT NAME: _____________________________________ SECTION: ___________

WRITTEN QUIZ Q6-NO.1

1. Most development economists now seem to agree that the level and rate of growth of GNI and
per capita income do not provide sufficient or even accurate measures of a country’s
development. What is the essence of their argument? Give some examples.

2. What is the relationship between a Lorenz curve and a Gini coefficient? Give some examples of
how Lorenz curves and Gini coefficients can be used a a summary measures of equality and
inequality in a nation’s distribution of income.

3. Economic growth is said to be a necessary but not sufficient condition to eradicate absolute
poverty and reduce inequality?

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 Unit Economic Development
Module Poverty, Inequality, and Development
AE12-ED ECONOMIC DEVELOPMENT Units: 3 Page |9

STUDENT NAME: __________________________________ SECTION: __________________

PERFORMANCE TASK Q6-1.1-1

PERFORMANCE TASK TITLE: Design a Program aimed at eradicating absolute poverty in the next
two decades
PERFORMANCE OBJECTIVE: After completing this written work, you should be able to construct
policy, different charts and graphs according to data interpretation requirement.
TOOLS AND MATERIALS: Module, Research materials through internet, news clippings
PERFORMANCE TASK: OUTPUT

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 Unit Economic Development
Module Poverty, Inequality, and Development
AE12-ED ECONOMIC DEVELOPMENT Units: 3 P a g e | 10

RUBICS:
0 / 1 POINT 2 / 3 POINT 4 / 5 POINT 6 / 9 POINT 10 POINT POINT TOTAL
SCORE
No logical Logical Clear Most ideas are All ideas are
Logic and connection connection logical logically logically
key points between the between the connection presented. presented.
ideas ideas is not between the
presented. well ideas.
presented.
Content of Content of Content of Content of the Content of
Content the essay is the essay is the essay essay is clear the essay
very hard to not easily can be and easy to flows and is
understand understood understood understand passionate.
Has many Distracting Occasional Only few Very clean
erasures and handwriting erasures erasures and and very well
Cleanliness handwriting is with slight but handwriting is presented
not well erasures. handwriting understandable
understood. is
acceptable
Fragmented Distracting Occasional Have very few No error in
sentences errors and errors in errors in spelling and
Spelling and and has is difficult to spelling and grammar and grammar.
grammar many errors read. grammar spelling.
ins spelling but not
and grammar. enough to
distract
Word choice Have Word Word choice Word choice
Word usage is inadequate several choice is makes piece and usage
or mistakes in simple but interesting are
inappropriate. word choice acceptable professionals.
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Module Poverty, Inequality, and Development
AE12-ED ECONOMIC DEVELOPMENT Units: 3 P a g e | 11

and usage.

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