What Is the Poverty Gap?

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.

Key Takeaways

  • The poverty gap reflects the intensity of poverty in a nation, showing the average shortfall of the total population from the poverty line.
  • The indicator is produced by the World Bank, which measures poverty by looking at per capita income and consumption in households.
  • The data is available for 115 countries and is updated semi-annually in April and September.
  • The poverty gap statistic is most valuable to economists and government officials for calculating the poverty gap index.

How the Poverty Gap Works

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.

In 2015, this threshold was updated from $1.25 to $1.90 per day. It is difficult to set a common international poverty threshold since different countries have different thresholds for poverty.

Around $160 billion per year is said to be needed to close the global poverty gap, according to data from 2013.

The World Bank’s poverty gap data is available for 115 countries worldwide and is updated semi-annually in April and September.

Poverty Gap 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.

Special Considerations

The commonly used poverty headcount ratio provides a simple count of all the people below a poverty line in a given population, considering them equally poor. For this reason, it is deemed by some to be a flawed measurement.

Poverty Gap Index

The poverty gap statistic is most valuable to economists and government officials for calculating the poverty gap index. The index, also produced by the World Bank, takes the mean shortfall from the poverty line and divides it by the value of the poverty line.

Important

A higher poverty gap index means that poverty is more severe.

If you multiply a country's poverty gap index by both the poverty line and the total number of individuals in the country, you get the total amount of money needed to bring the poor in the population out of extreme poverty and up to the poverty line, assuming perfect targeting of transfers.

For example, suppose a country had 10 million citizens, a poverty line of $500 per year and a poverty gap index of 5%. In such a case, an average increase of $25 per individual, per year, would eliminate extreme poverty. The $25 is 5% of the poverty line, and the total increase needed to eliminate poverty is $250 million—$25 multiplied by 10 million individuals.

The poverty gap index is additive. In other words, the index can be used as an aggregate poverty measure, as well as decomposed for various sub-groups of the population, such as by region, employment sector, education level, gender, age, or ethnic group.