Hello,
I have a very interesting case in relation to growth elasticity of poverty.
General formula suggests that -(%dPR/%dInc) percentage change in poverty rates should be divided on percentage change on income. I am calculating this elasticity from consumption wise rather than income wise. All poverty rates are calculated from consumption.
Percentage change in consumption level between 2013 and 2015 is positive 0.130382294 and between 2015 and 2017 negative -0.062655749 . Percentage change in poverty rate between 2013 and 2015 is negative -0.451612903 but between 2015 and 2017 positive 1.529411765
GEP (2013-2015) in case of extreme poverty = - ( -0.451612903 /0.130382294 ) = 3.5
GEP (2015-2017) in case of extreme poverty = - ( -0.0626557493.5 / 1.529411765 ) =24.4
In the first scenario it is clear that 1 unit increase in consumption decreases extreme poverty by 3.5 times . Elasticity is positive
In the second case, I have completely different scenario. Since consumption decreased and poverty rate increased, I got 24.4. 1 unit decrease in consumption increases poverty by as much as 24.4 times ( is it correct to calculate GEP in this way when you have decrease in consumption? I have seen that ratio should range between 1.5 to 5 ) Maybe for this type of situation, I have to use different formula ? Can anyone correct me if I am wrong?
I would much appreciate your support.
Best regards,
Davit
Davit:
I have a question/comment about your ratio. Perhaps I am missing something, or my own view of this is incorrect, but see if the following makes sense.
To create your elasticity measure, you followed the traditional growth elasticity of poverty index measure which divides poverty by income, with the latter measured as per capita income. That makes sense to the extent that you could argue that the percent of people living in poverty would have some relationship to mean per capita income -- but that assumes that poverty is an absolute measure and not relative to income levels in different contexts (there is an absolute definition of poverty, and the meaning of poverty is not relative to conditions in a location). In building on that elasticity measure, you substituted the change in consumption for income, so you divided poverty by consumption. In a theoretical sense, this would suggest that poverty is affected by consumption. In other word, the model you used assumes that the percentage of people in poverty is a function of the mean level of consumption. Logically, that may not make sense, and would also affect how you interpret the ratio you derive.
It seems logically that poverty affects consumption -- that is, the greater the percentage of poor people in a location, the lower the level of consumption might be. But, that would depend on other factors such as the income distribution and the level of disposal income for other income groups. In any event, if consumption affects poverty, then the ratio would be reversed. If you did that with the data you show above, for 2013-2015, the outcome is -0.32123 (0.13038/-0.451619) – or consumption is going up while poverty is declining, which makes theoretical sense (less poverty, more consumption or as poverty declines by 1%, consumption rises 0.3 percent). In the second case (2015-2017), the ratio should be -0.062655749/ 1.5929411765 = -0.040967, so here, consumption is declining while poverty increases, which again makes theoretical sense – as poverty increases by 1%, consumption declines by 0.0409 percent.
In market economies consumption grows through cycles.Hence the elasticity of income (poverty) with consumption - if I assume that direction of causality, should be following a lag lead cyclical fluctuation, this perhaps explains part of your mismatch. You can take a look at the Permanent Income Hypothesis kind of macroeconomic real business cycle research for some of these explanations.
Soumitra K. Mallick
- Badges
- Science topic
- Similar topics
- Correction