Poverty Index with Time-Varying Consumption and Income Distributions

Abstract

Poverty is defined as degree of deprivation in consumption of an essential commodity. Employing Ernst Engel’s approach we derive a hierarchy of needs and identify the basic needs. We then use the Engel curve for that commodity to determine the saturation level of consumption of the basic need. The shortfall from that saturation level is defined as poverty index. Employing an adaptive economic model and an analogous model from physics we describe the time variation in income and consumption distributions. Our model is a dynamic agent-based model of market exchange of assets for income generation and of income for commodities. We test the model using the data for India drawn from the poverty data file of the World Bank. We use this model to obtain a predictive model for poverty in India without using any subjective and or arbitrary poverty line. Our poverty estimated do reveal an increase in poverty until 1971 and a decline from then on vindicating the development strategy of economic growth until the end of the Fourth Plan and growth with equity from the Fifth Plan onwards. Our study also shows that there was a steady decline in the saturation level of basic needs. Our approach is data based devoid of any subjectively introduced constructs.