Chapter 2
Income Standards, Inequality, and Poverty
This chapter complements the introductory chapter by providing a detailed discussion and more formal analysis of the concepts involved in measuring income standards, inequality, and poverty. This chapter follows closely the introduction’s organization. It is divided into four sections. The first section introduces notations and basic concepts that will be used throughout the rest of this chapter. The second and third sections discuss tools and instruments related to income standards and inequality measures. The fourth section uses the tools from the second and third sections to construct poverty measures. According to Sen’s seminal work (1976a), evaluating poverty within a society (which may be a country or other geographic region) involves two steps: 1. Identification, in which individuals are identified as poor or nonpoor 2. Aggregation, in which data about the poor are combined to evaluate poverty within the society. However, to identify individuals as poor or nonpoor, we need to select a space on which their welfare level is to be assessed. The welfare indicator is the variable for assessing an individual’s welfare level. Thus, evaluating poverty within a society involves three steps:
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