A Unified Approach to Measuring Poverty and Inequality
it does not have an intuitive interpretation like the two basic measures, the SST index and the squared gap measure and its monotonic transformation (the mean gap measure). Also, like these other measures, it does not have an upper bound of one. Finally, the CHUC class of indices is a generalization of the Watts index. Like the Watts index, its members satisfy all the properties discussed earlier and also lie between zero and one. However, measures in this class are not defined for zero incomes when α ≤ 0. Policy Relevance of Poverty Measures Besides gauging the level of deprivation in a society, a poverty measure can have crucial policy relevance. In fact, different measures may have different policy implications. We discuss three policy implications below with certain examples. First is the influence of poverty measures as targeting tools. Second is the relevance of poverty measures in guiding public policies. Third is the use of the additive decomposability property for geographic targeting. How Do Different Poverty Measures Influence the Targeting Exercise? Besides gauging the level of deprivation in a society, a poverty measure is a useful tool that can influence a policy maker’s targeting exercise. An important question that is often asked is the following: if a policy maker has allotted a certain amount of the budget that he or she can spend on the welfare program for the poor, how should that budget be allocated among the poor? For instance, consider the following six-person society with income vector x = ($80, $100, $800, $1,000, $50,000, $70,000). The poverty line is set at $1,100 so that four people are poor and two people are nonpoor. It is evident that the society’s policy maker requires at least $2,420 so that he or she can drive all four poor people out of poverty. Suppose that the policy maker can allot only $1,000 toward the welfare program for the poor. Then how should that budget of $1,000 be allocated among the poor? The answer depends on which poverty measure is used to assess the society’s deprivation. Different poverty measures provide different answers for this targeting exercise. We begin this analysis when the society’s poverty is assessed by the headcount ratio. The easiest way for a policy maker to reduce the headcount ratio is to bring as many poor people as possible up to the poverty line. Therefore, the first $100 of the allotted budget would be spent on the richest
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