POVERTY REDUCTION STRATEGY TN

Annexure 1.2
POVERTY LINE: CONCEPT AND MEASUREMENT
a. Absolute and Relative Thresholds
In most measurement exercises, there is a sharp dividing line below which a person is
counted as poor. This divider is often called the “poverty line”. The general approach to
specifying a poverty line is to estimate the cost of a bundle of goods deemed to assure
that basic consumption needs are met. For developing countries, the most important
component of a basic needs poverty line is the food expenditure necessary to attain a
specified food energy intake, which may be augmented by an allowance for non-food
needs.
Setting food energy requirements, however, is quite problematic. There is little
direct evidence on energy requirements. One widely used procedure (FAO/WHO/UNO
1985) is to take energy requirements relative to alternative levels of activity and body
weight. Activity levels may be endogenous socio-economic variables rather than
exogenous physiological variables. A normative judgment needs to be made about
desirable activity levels, so that corresponding energy requirements may be determined.
Another problem relates to measuring the cost of the normative nutritional
requirement, and in making provision for non-food consumption. A popular and often
preferred method is to find the consumption expenditure at which a person is expected
to attain the food energy requirement. This can be estimated from establishing a
relationship between food intake and consumption expenditure. Depending on how the
relevant norms are defined, the poverty line can be determined. Many a time, the
poverty line is defined with reference to absolute norms that are exogenously specified.
However, the relationship between food energy intake and consumption or
income is not going to be the same across sub-groups or dates, and it shifts according to
differences in income, tastes, activity levels, relative prices, levels of publicly provided
goods, and other relevant factors.
Some other methods aim to directly measure the cost of a normative food and
non-food consumption bundle. The food bundle is related to the nutritional requirement,
consistent with the tastes of the poor. Data on food prices are used for valuation. Setting
the non-food component is more difficult. If non-food prices are not available, a
reasonable choice [Ravallion (1993a), Ravallion and Bidani (1994)] for the non-food
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