Poverty Lines

What is the median national poverty line? How is it determined?

Poverty lines are generally set by national governments, and used together with household survey data to measure the prevalence of poverty. Median poverty lines are set by the USAID Poverty Assessment Tools team using national survey data. These lines correspond to the amount of per capita income or consumption expenditures that divides the poorest half of those living below the national poverty line from the less-poor half of the officially poor.

What is the $1.25/day or International Poverty Line? How is it determined?

The international poverty line was first developed by World Bank researchers working on the 1990 World Development Report (WDR), which focused on poverty. In order to estimate the share of the world's population living in extreme poverty, the WDR team examined the national poverty lines that low-income countries were themselves using to track poverty among their own citizens. To compare these national poverty lines, they first had to be converted to a common currency; for this conversion, the WDR team used Purchasing Power Parity (PPP) exchange rates, which are adjusted for differences in the purchasing power of currencies in domestic markets (more on PPP exchange rates below). Once this adjustment was made, it turned out that the poverty lines of the poorest countries spanned a range between $275 and $370 per year in PPP terms at 1985 prices. These two values were used as the basis for constructing the first solid estimates of the global prevalence of extreme poverty in reference to a common poverty line. Because the higher of these two values was so close to $1 per day, it soon became known as the “dollar a day line.”

In 2000, the World Bank significantly revised the international poverty line, in order to take advantage of new PPP data covering a much larger number of developing countries. The resulting line was $1.08 per day at 1993 PPP- that is, at purchasing power parity based on 1993 prices.  This figure was recalibrated again with 2005 data to the current standard of $1.25. Although the new lines differ from the original version, it continues to be called the “dollar a day line,” and serves as the common international standard of extreme poverty.

It is essential to notice that PPP exchange rates tend to be very different from standard market exchange rates, especially for countries at very different levels of real income. For example, at mid-2005 prices, the market exchange rate to the US dollar was 1.4 times the PPP exchange rate in Albania, 2.5 times in Bolivia, 3.7 times in Mozambique and Uganda, and 5.5 times in Vietnam. That means that using market exchange rates to compute the local currency equivalent of the "$1 a day line" produces values completely different than those resulting from using PPP exchange rates as required in the legislation. The main source of the difference is that many services tend to be relatively much cheaper in poor countries than in rich countries; because those services are not traded internationally, the difference in their relative cost affects PPP exchange rates but not market exchange rates.

The key to computing these values are the consumption PPPs published by the World Bank at http://iresearch.worldbank.org/PovcalNet/index.htm .


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