Question

1. What is the criticism about determining poverty, based on a headcount relative to the average poverty gap?

2.

a. Draw a budget constraint and an initial indifference curve for both consumer goods, c, and number of children for consumer

b. Assume that due to an aging population in this economy, the government implements policies that reduce the costs of having children. How does this change affect your diagram in a above? Show the changes that take place in your graph from a. Explain.

Answer 1

Question 1 Answer:-

The Headcount Index is calculated by taking the total number of people in a country who fall below a predetermined income level and dividing this figure by the total population. In other words, the Headcount Index is simply the percentage of the population that falls below the official poverty line.
The poverty gap is a ratio showing the average shortfall of the total population from the poverty line—the minimum level of income required to secure the basic necessities for survival. In other words, it reflects the intensity of poverty in a nation.

The poverty gap indicator is produced by the World Bank Development Research Group. It measures poverty by looking at household per capita income and consumption.
The World Bank says it needs to measure all people against the same standard. As such, it sets an international poverty line at periodic intervals, calculating the cost of living for basic food, clothing, and shelter around the world.

Example :-The United States has its own poverty threshold, which varies depending on the state and the number of people in a household. As of 2018, the average threshold for a family of four stood at $25,100.

That means that a married couple with two children and an annual household income of $20,000 is judged to live below the poverty line. The poverty gap in this example would be $5,100  
In 2017, the U.S. Census Bureau reported that there were just shy of 7.8 million families and 12.6 million individuals in the country with an income below the poverty threshold. According to its data, the poverty gap for these families and individuals, on average, was $10,819 and $7,327, respectively.

The best part of the headcount poverty measure is that it is simple to construct and easy to understand. However, it does have its drawbacks. The headcount measure doesn't take into account the intensity of poverty. Two countries could have the same headcount poverty rate,but the inequality in the countries can be vastly different. Second, the headcount poverty rate does not indicate how poor the poor are. Therefore a country can lower its headcount rate just by giving benefits to those closest to the poverty line because they are cheapest to move across the line. Third, the poverty estimates should be calculated for individuals and not households. One poor household could consist of more individuals than a smaller rich family, yet they are counted as the same.

Given the many drawbacks of the headcount ratio, here are few poverty measurements that can be used instead:

Poverty Gap Index.
Squared Poverty Gap Index.
Both of these give more weight depending on how poor an individual is. These two methods are not used by politicians much, because, as it was mentioned before, it looks better if you can give a small amount of money to a person just below the poverty line to get them out of poverty and reduce your country's poverty rate without really solving the problem.