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ECON5001

Economic Development in Theory and Practice

Problem Set #2

There is one question with four sub-questions for you to work on in this problem set (6% of the unit marks). Marks allocated to each sub-question are given in the parenthesis (in %).

This problem set is related to the poverty and income inequality. Consider a population of 116 individuals living in rural and urban areas of a developing country. Consumption expenditure per capita (in Rupees) is provided for all 116 individuals in an Excel spread sheet “Poverty_inequality_data_Assmt.xlsx”. Further, consider that the poverty line based on consumption expenditure per capita is estimated at 5000 Rupees.

Based on this information, compute the following measures of poverty and income inequality. Interpret and briefly comment on your findings.

1. ���_��� indicators of poverty (35%)

2.  Contribution of rural population to the total P₀ poverty index (20%)

3.  Kuznets ratio (20%)

4.  Gini coefficient (25%)

You may find following note useful for this problem set.

Poverty measures

Foster-Greer-Thorebecke (FGT) Index (���_��� – class indicator of poverty)

= head count ratio or poverty rate. It is the share of people who are poor in the population.

= poverty gap index or depth of poverty. It is the ratio of the targeted to untargeted budget

needed to eliminate poverty.

= Severity of poverty index. It represents the share of the ‘extreme poor’ among the poor.

Decomposing poverty by population sub-group:

, where ���_���=���_���/��� is the population share of subgroup j

The % contribution of subgroup j to the total poverty index = 100 x /���_���

Inequality measures

Kuznets ratio (20/20 or 25/25): Quantile ratio - the income shares of the highest quantile (top 25%) over the income share of the lowest quantile (bottom 25%) ~ Kuznets 25/25 ratio.

Gini coefficient:

Where y_r is the income of the individual with rank r between 1 and n (n = 1 to 120)