Chapter 5

Poverty, Inequality and
Development
Chapter 5 Lecture 7
Lorenz Curve
 Lorenz curve A graph depicting the variance of the size distribution of income or
wealth from perfect equality.
 The Lorenz curve shows the actual quantitative relationship between the percentage
of income recipients and the percentage of the total income they receive during
given year
 The numbers of income recipients are plotted on the horizontal axis
 The vertical axis shows the share of total income received by each percentage of
population
 The more the Lorenz line curves away from the diagonal (line of perfect equality),
the greater the degree of inequality represented
 The extreme case of perfect inequality (i.e., a situation in which one person
receives all of the national income while everybody else receives nothing) how
would the Lorenz curve look like?
Gini Coefficients and Aggregate
Measures of Inequality
 Gini coefficient An aggregate numerical measure of income inequality
ranging from 0 (perfect equality) to 1 (perfect inequality).
 It is measured graphically by dividing the area between the perfect equality
line and the Lorenz curve by the total area lying to the right of the equality
line in a Lorenz diagram.
 The higher the value of the coefficient, the higher the inequality of income
distribution; the lower it is, the more equal the distribution of income
Functional Distribution
 The functional or factor share distribution of income attempts to

explain the share of total national income that each of the factors of
production (land, labor, and capital) receives
 It attempts to explain the income of a factor of production by the
contribution that this factor makes to production
 Income is distributed by function
 Laborers are paid wages
 Owners of land receive rents
 Capitalists obtain profits
The traditional theory of functional
income distribution
 Supply and demand curves are assumed to determine the unit prices of each
productive factor
 When these unit prices are multiplied by quantities employed, we get a
measure of the total payment to each factor.
 For example
 The supply of and demand for labor are assumed to determine its market wage
 When this wage is multiplied by the total level of employment we get a measure of
total wage payments, also sometimes called the total wage bill.
Measuring Absolute Poverty
 Absolute poverty The situation of being unable or only barely able to meet
the subsistence essentials of food, clothing, and shelter.
 They are counted as the total number living below a specified minimum level
of real income—an international poverty line
 Absolute poverty can and does exist although its magnitude is likely to be
different in terms of percentages of the total population across the globe
 Absolute poverty is sometimes measured by the number, or “headcount,” H,
of those whose incomes fall below the absolute poverty line, Yp
 When the headcount is taken as a fraction of the total population, N, we
define the headcount index, H/N
Total poverty gap (TPG)
 In many respects, however, simply counting the number of people below an

agreed-on poverty line can have its limitations
 Economists therefore attempt to calculate a total poverty gap (TPG) that
measures the total amount of income necessary to raise everyone who is
below the poverty line up to that line
 The TPG is found by adding up the amounts by which each poor person’s
income falls below the absolute poverty line
 On a per capita basis, the average poverty gap (APG) is found by dividing the
TPG by the total population

The Newly Introduced Multidimensional
Poverty Index
 United Nations Development Program used its Human Poverty Index from 1997
to 2009
 UNDP replaced the HPI with its new Multidimensional Poverty Index (MPI); by
building up the index from the household level
 Multidimensional Poverty Index (MPI) A poverty measure that identifies the
poor using dual cutoffs for levels and numbers of deprivations
 Then multiplies the percentage of people living in poverty times the percent
of weighted indicators for which poor households are deprived on average.
Global Multidimensional Poverty Index:
dimensions and indicators of poverty

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Poverty, Inequality and

 The functional or factor share distribution of income attempts to

 In many respects, however, simply counting the number of people below an

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