APPENDIX A Measurement of Living Standards and Inequality

To examine poverty and inequality, we need a measure of well-being. Ideally, this measure should correspond as closely as possible to the way individuals experience their standards of living, including the effects of access to social services; social stigma; stress; insecurity; vulnerability; and social exclusion. Here we focus only on material well-being, which we measure using information on household expenditure or income. The construction of the measure of material well-being involves two steps. First, we need to decide whether to base it on income or consumption, and which components of income or consumption to include. Second, we need to decide how to adjust the income or consumption measure for economies of scale at the household level. To estimate a poverty rate based on the measure of well-being, we need to establish a poverty line. The poverty line is discussed below. More detailed information on the measurement of living standards and the calculation of poverty and inequality statistics can be found in World Bank (1993), Ravallion (1994), and Deaton (1997). This measure of well-being can also be used to calculate inequality statistics.