Poverty is the state where people whose income levels are lower than a given "poverty line" find themselves. The poverty line corresponds to the income considered minimally sufficient to sustain a family in terms of food, housing, clothing, health care, education, etc. In some western countries this level is placed at 60% of the average national income.
The headcount index is the proportion of the population for whom consumption — or other measures of living standard — is less than the poverty line.
Initially, the WB (World Bank) tracked "extreme poverty" at two levels:
people living on $2 a day or less: percentage of the population with average consumption expenditures less than $2.15 a day measured in 1993 prices converted using purchasing power parity (PPP) rates. The $2.15 a day standard was chosen to be equal to the median of the lowest ten poverty lines among a set of low-income countries;
people living on $1 a day or less: threshold of extreme poverty (more than 1 billion people subsist on less than $1.08 a day in 1993 PPP$).
In 2008, the WB issued the results of a study comprising the updating at 2005 of the price basis for the poverty estimates, and the newly revised poor population estimates. The highlights are:
The "$1 a day" poverty line rested upon an underestimated cost of living. Accordingly, the latest poverty line became "$1.25 a day" in 2005 prices, and corresponds to the mean of the national poverty lines in the poorest 15 countries.
The cost of living being higher, the number of people living in poverty is also higher. By the new measure, 1.4 billion people lived below the "$1.25 a day" line in 2005. Previous estimates were 950 million people.
The revised estimates show an additional 400 million people living in extreme poverty. However the rate of decrease in the poverty rate between 1981 and 2005 remains about the same, at about 1 percentage point per year for the developing world as a whole. The new data does not reflect increases in food prices since 2005 because of lags in survey data availability.
The "$2 a day" line represents the median poverty line (measured in 2005 PPP terms) of all developing countries. It is a poverty line more typical of middle-income countries. The WB estimates that 2.6 billion people lived below $2 a day in 2005.
As of October 2015, the new global line has been updated to $1.90.
As differences in the cost of living across the world evolve, the global poverty line has to be periodically updated to reflect these changes. The new global poverty line uses updated price data to paint a more accurate picture of the costs of basic food, clothing, and shelter needs around the world. In other words, the real value of $ 1.90 in today's prices is the same as $1.25 was in 2005.
The WB estimates that, against the new $1.90/day line, over 900 million people lived in extreme poverty in 2012. In 2015, the headcount was of over 700 million people.
Many non-monetary indicators — on education, health, sanitation, water, electricity, etc — are extremely important for understanding the many dimensions of poverty that people experience. They form an important complement to monetary measures of poverty and are crucial to effectively improving the lives of the poorest. The global poverty line does not currently take these multiple dimensions of poverty into account. However, the WB is currently assessing how to measure and how to improve this going concern.
In early 2016, the WB represents the world "extreme poverty" situation as follows:
Poverty headcount ratio at $1.90 a day (2011 PPP)
% of population ¹
East Asia & Pacific
Europe & Central Asia
Fragile and conflict affected situations
Latin America & Caribbean
¹ Reference year 2012.
Benefits and shortcomings of the headount index
Simple to construct.
Easy to understand.
But it ignores differences in well-being between different poor households. It assumes all poor are in the same situation.
It does not take the intensity of poverty into account — insensitive to differences in the depth of poverty of the poor.
Over time, the index does not change if individuals below the poverty line become poorer or richer, as long as they remain below the line
The headcount index remains the most popular poverty measure. However, in order to capture the different depths of poverty among countries having the same headcount index, the WB implemented another measurement named the Poverty gap.