Chapters 5 and 6
Mexico Poverty and Inequality Assessment, 1998 and 2010
Answers
You are asked to make a poverty and inequality assessment for Mexico over the period
1998 to 2010. This is a period that saw both overall growth but also the impact of the
2006 food crisis and the 2007 ̶ 09 Great Recession in the United States. You will do this
using the concepts developed in Chapters 5 and 6 on poverty and inequality. The data you
are given are the per capita consumption for a nationally representative random sample of
300 Mexican households in 1998 and in 2010. The question of interest to the Mexican
government is how poverty and inequality changed over the period.
The data are in constant pesos of 2004 so the food-based poverty line (z) is the same for
the two periods, set at 1,300 pesos.
1. Using the 1998 and 2010 data in the exercise spreadsheet, calculate the mean per
capita consumption in each of the two years. How did it change over the period?
Calculate the average annual growth rate in mean per capita consumption over the period.
Give your results in the summary table.
2. Represent the poverty profiles for the two years on a single graph. Place the poverty
line on the graph as well. You may want to omit values of per capita consumption above
5,000 pesos so you see better on your graph where the action is around the poverty line.
What do you see? How do you read your graph to infer that the incidence of poverty
(headcount ratio) increased or decreased? Paste the graph in your report.
All households across the distribution enjoyed unambiguous growth in consumption.
Households are ranked in ascending order by consumption level such that the intersection
of the household rank number on the x-axis that corresponds with the intersection of the
household consumption line and the poverty line is the poverty headcount. The poverty
count divided by the 300 household count of the sample yields the poverty headcount
ratio. This intersection point clearly moves left from 1998 to 2010 suggesting poverty
headcount ratio declined between those years.
1
5,000
4,500
4,000
3,500
3,000
2,500
2,000
1,500
1,000
500
0
50
100
150
2010
200
250
300
1998
3. Define the P0 and P1 indicators and explain what they mean. Calculate these indicators
for each of the two years. Did poverty increase or decrease according to them? On a
percentage basis, which indicator changed the most? What does this tell you about the
way poverty has changed? Give your results in the summary table.
The P0 indicator is the poverty headcount divided by the population indicating the
percentage of the population that has annual consumption below the poverty line.
The P1 indicator is the poverty gap indicator that captures the ratio of the cost of a
perfectly targeted transfer to eradicate poverty (targeting the poor only) versus a needblind transfer that provided at least consumption at the poverty line for all citizens.
The poverty gap index (P1) declined more than the headcount ratio (P0) suggesting the
reduction in poverty occurred across the distribution of the poor, i.e. not just among the
somewhat poor, but also among the very poor. In other words, poverty alleviation efforts
seem to have been relatively well targeted.
4. Represent inequality by drawing a Lorenz curve for each of the two years on a single
graph. What do you see? What does this imply for the distribution of consumption? Paste
the graph in your report.
Between the two periods the share of wealth consumed by the poorer households
increases and the Kuznets curves cross, suggesting density in the distribution of
consumption was distributed from the lower middle class to the poor.
2
100.00%
90.00%
80.00%
70.00%
60.00%
50.00%
40.00%
30.00%
20.00%
10.00%
0.00%
0.00%
10.00%
20.00%
30.00%
40.00%
50.00%
Lorenz-98
60.00%
70.00%
80.00%
90.00%
100.00%
Lorenz-10
5. Calculate the Gini coefficient for the two periods. Recall that the Gini coefficient can
be calculated using the Excel formula:
=((2/(N*mean consumption))*COVAR(rank, expenditure))
According to the Gini coefficient, did inequality increase or decrease? Give your results
in the summary table.
According to the Gini, inequality increased.
6. To confirm what you find on inequality using the Gini coefficient, calculate the
following two Kuznets inequality ratios:

Total consumption of the richest 20% relative to the total consumption of the
poorest 20%. Does this indicate a change in inequality that corresponds to what you
found with the Gini coefficient?
This reduction in the 20/20 Kuznets contradicts findings from the Gini analysis and
suggests inequality did decrease between 1998 and 2010.

Total consumption of the richest 5% relative to the total consumption of the
poorest 20%. Again, does this indicate a change in inequality that corresponds to what
you found with the Gini coefficient?
Similar to the 20/20 Kuznets, estimation of the 5/20 Kuznets contradicts findings from
the Gini analysis suggests inequality did decrease between 1998 and 2010. The similar
proportion of the decline in both Kuznets indicators suggests reductions in inequality
were not merely due to transfers from or slower consumption growth among the few
wealthiest households (e.g. top 5%).

If the Kuznets ratios do not always confirm what the Ginis show, explain your
finding. What does it say about the evolution of inequality? Give your results in the
summary table.
Inequality across the broad population can move in different directions than inequality
among sub-groups of the population. The naïve Gini estimate that suggests inequality
increased does not consider the distribution of changes in consumption between poor,
3
middle-class, and wealthy households, for example. If the elasticity of consumption in
growth is particularly high for the poor and the wealthy, for example, but low for the
middle class who may be paying higher relative taxes to support transfers to the poor, the
Kuznets indicators may improve while the Gini gets worse.
7. Discuss your findings: Over the period, was average per capita consumption growth
associated with poverty reduction? Was growth associated with a change in inequality?
Was growth “pro-poor” in the UNDP sense? Was growth pro-poor in the sense of having
taken poor people out of poverty? Explain and place your answers in the summary table.
Average per capita growth was associated with unambiguous reductions in poverty.
Inequality between richest and poorest households declined, but did not necessarily
decline across the whole population. Growth appears pro-poor in the UNDP sense in that
the elasticity of consumption for the poor in national income was greater than that of the
rich. Growth was also pro-poor in the sense that people successfully exited poverty.
Summarize your results in the following table:
Summary table
1998
2010
Mean per capita
consumption
1529.96
2715.12
P0 headcount ratio
P1 depth of poverty
Gini coefficient
Kuznets ratio 20/20
Kuznets ratio 5/20
Growth pro-poor
according to UNDP?
Growth pro-poor in
reducing poverty?
.59
.29
.47
12.55
20.19
.35
.12
.49
9.46
14.95
Average annual
growth rate 1998 to
2010
4.896%
% change between
1998 and 2010)
40%
58%
Y
Y
4