What Is Poverty Gap Index?
The poverty gap index (PGI) is a vital Poverty Measurement tool that quantifies the average depth and intensity of poverty within a given population. Unlike measures that simply count the number of people below a certain threshold, the poverty gap index assesses how far, on average, the incomes of the poor fall below the established poverty line. It provides a more nuanced picture of deprivation, offering insights into the financial resources needed to lift all poor individuals to the poverty line. As an economic indicator, the poverty gap index is crucial for policymakers and organizations involved in humanitarian aid and development.
History and Origin
The concept of measuring poverty has evolved significantly, moving beyond simple counts to more comprehensive assessments of deprivation. Early in the 20th century, economists began advocating for the use of poverty lines to define a minimum income necessary for basic subsistence.15 The need for a measure that captures not just the prevalence but also the severity of poverty led to the development of indices like the poverty gap index. This refinement was part of a broader push by economists and policymakers to gain deeper insights for effective interventions, as simpler measures like the headcount ratio did not reveal the financial shortfall of the poor.14 The poverty gap index is a specific instance of the Foster-Greer-Thorbecke (FGT) family of poverty measures, first introduced in 1984 by James Foster, Joel Greer, and Erik Thorbecke, which offered a more robust framework for analyzing poverty depth and severity.13
Key Takeaways
- The poverty gap index measures the average shortfall of the poor from the poverty line, indicating the depth of poverty.
- It is expressed as a percentage of the poverty line or as a fraction between 0 and 1.
- A higher poverty gap index signifies more severe poverty within a population.
- This index is more informative than the simple poverty headcount ratio because it accounts for how far individuals fall below the poverty line.
- It is used in policy making and resource allocation to target interventions effectively.
Formula and Calculation
The poverty gap index (PGI) is calculated by summing the individual poverty gaps (the difference between the poverty line and a poor person's income) for all poor individuals, and then dividing by the total population multiplied by the poverty line. This average is often expressed as a percentage.
The formula is:
Where:
- (N) = Total population
- (q) = Number of individuals below the poverty line
- (Z) = Poverty line
- (Y_i) = Income (or consumption) of individual (i)
- ((Z - Y_i)) = Poverty gap for individual (i) (only if (Y_i < Z), otherwise it's 0)
Essentially, it's the sum of normalized poverty gaps of the poor, averaged across the entire population. The World Bank provides definitions for the poverty gap, clarifying it as the mean shortfall in income or consumption from a specified poverty line, expressed as a percentage of that line.12
Interpreting the Poverty Gap Index
Interpreting the poverty gap index provides critical insights into the severity of poverty, not just its prevalence. A PGI of 0% indicates that no one in the population is living below the poverty line. Conversely, a PGI of 100% would theoretically mean that everyone in the population has zero income. In practice, the PGI typically ranges between these extremes.
A higher poverty gap index suggests that the poor in a country are, on average, much further below the poverty line, indicating a more significant financial shortfall and a greater challenge for poverty reduction efforts. For example, two regions might have the same proportion of people living in poverty (headcount ratio), but one could have a much higher PGI, revealing that its poor population faces more extreme deprivation. This distinction is vital for understanding the true standard of living and prioritizing public policy initiatives. It highlights the depth of poverty and the magnitude of financial transfers needed to bridge the gap.
Hypothetical Example
Consider a small community of 100 people with a defined poverty line of $100 per month.
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Scenario A: 20 people are living below the poverty line.
- 10 people earn $80/month (gap = $20 each)
- 10 people earn $50/month (gap = $50 each)
- The remaining 80 people earn $100 or more.
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Calculation for Scenario A:
- Total poverty gap for the first 10 people: (10 \times ($100 - $80) = $200)
- Total poverty gap for the next 10 people: (10 \times ($100 - $50) = $500)
- Aggregate poverty gap: ($200 + $500 = $700)
- Normalized poverty gap for each group:
- First group: (10 \times \frac{$20}{$100} = 2)
- Second group: (10 \times \frac{$50}{$100} = 5)
- Sum of normalized gaps: (2 + 5 = 7)
- PGI = (\frac{7}{100} = 0.07) or 7%
A 7% poverty gap index indicates that, on average, the population's income is 7% below the poverty line. This helps decision-makers understand the scale of the financial intervention required. For instance, if the goal is to eliminate poverty in this community, approximately $700 per month would be needed to bring all poor individuals up to the poverty line, assuming perfect targeting of funds. This approach provides a clearer picture than just knowing that 20% of the population is poor.
Practical Applications
The poverty gap index is an indispensable tool in the fields of development economics, social planning, and international aid. It helps governments and international organizations, such as the World Bank, to understand the true scale of deprivation and effectively allocate resources. By quantifying the average income shortfall, the PGI supports data analysis for targeted interventions.11
For example, when setting and monitoring global benchmarks like the Sustainable Development Goals (SDGs), particularly SDG 1, which aims to end poverty in all its forms, the poverty gap index provides a more comprehensive picture than the simple headcount ratio. The United Nations uses various poverty metrics, including the poverty gap, to track progress and identify areas requiring urgent action.109 Organizations like the OECD also track the poverty gap as a key indicator of income inequality and social welfare, using it to inform policy decisions across member countries.8 It is used to design and evaluate the efficacy of social welfare programs, ensuring that aid reaches those most in need and bridges the actual income deficit.7 Data on the poverty gap index across various regions and income levels, often provided by organizations like Our World in Data, underscores its role in global poverty assessment.6
Limitations and Criticisms
While the poverty gap index offers a significant improvement over simpler poverty measures, it is not without limitations. A primary criticism is that it does not account for income inequality among the poor.5 This means two scenarios could yield the same poverty gap index, even if one involves a few individuals suffering extreme destitution while the other involves many individuals just below the poverty line. The index also does not capture qualitative aspects of poverty, such as access to healthcare, education, or other non-monetary deprivations, which are critical components of a holistic standard of living.4
Furthermore, the accuracy of the poverty gap index relies heavily on the definition of the poverty line and the quality of underlying income or consumption data collected, often through household surveys.3 Variations in data collection methodologies or the arbitrary setting of the poverty line can significantly influence the calculated index, potentially misrepresenting the true extent of poverty.2 Despite its quantitative strengths, critics argue that focusing solely on the income gap can divert attention from broader issues like capabilities and personal resources that contribute to sustainable poverty eradication.
Poverty Gap Index vs. Poverty Headcount Ratio
The poverty gap index and the poverty headcount ratio are both fundamental statistical methods used in Poverty Measurement, but they provide different levels of insight.
The poverty headcount ratio simply measures the proportion of the population whose income or consumption falls below a designated poverty line. It tells you how many people are poor as a percentage of the total population. For example, a 20% headcount ratio means one-fifth of the population is considered poor. Its main strength is its simplicity and ease of understanding. However, its primary weakness is that it fails to capture the depth of poverty; it does not change if the poor become even poorer.1
In contrast, the poverty gap index addresses this limitation by quantifying how far the poor are, on average, from the poverty line. It considers the actual income shortfall of each poor individual. This makes the PGI sensitive to changes in the incomes of the poor—if a poor person's income decreases, the poverty gap increases, reflecting a worsening situation. While the headcount ratio tells you prevalence, the poverty gap index tells you intensity or severity. This distinction is crucial for policy making, as a high PGI indicates a more urgent and significant need for intervention than a low PGI, even with a similar headcount ratio.
FAQs
Why is the poverty gap index considered better than the headcount ratio?
The poverty gap index is considered superior because it measures not only how many people are poor but also how poor they are. The headcount ratio only tells you the percentage of people below the poverty line, but it doesn't indicate the severity of their poverty. The PGI provides a more complete picture of the depth of deprivation, which is crucial for effective resource allocation and aid efforts.
How is the poverty line determined for the poverty gap index?
The poverty line is a critical component. It is typically set as a minimum income or consumption level deemed necessary to meet basic needs in a specific country or globally. International poverty lines, like those set by the World Bank, are often adjusted for purchasing power parity (PPP) to allow for comparisons across developing economies and developed nations. National poverty lines are determined by individual governments based on local economic conditions and the cost of basic goods and services.
Can the poverty gap index be used to compare poverty across different countries?
Yes, the poverty gap index can be used for cross-country comparisons, especially when a common international poverty line is applied, such as the World Bank's international poverty lines (e.g., $2.15 or $3.65 a day in 2017 PPP). These standardized lines, along with consistent statistical methods for data collection, allow for meaningful comparisons of poverty depth and aid effectiveness between different nations, regardless of their nominal gross domestic product (GDP).