Principles of Microeconomics / Unit 14 MIC 1303 worked example, 60 to 90 seconds
Poverty Line Arithmetic
The idea
Build a threshold from a food budget by the one-third rule: multiply the cost of an adequate diet by three. Adjust for family size by using that family's food budget, and for a price change by scaling the threshold with prices. Then test a family both ways: absolute, against the threshold; relative, against a share of median income. The two tests can disagree, and the disagreement is the point.
In practice
Worked example: an adequate diet for a family of four costs nine thousand dollars a year, so the threshold is twenty-seven thousand. For a family of three the diet costs seven thousand, threshold twenty-one thousand. Prices rise ten percent: the four-person threshold becomes twenty-nine thousand seven hundred. A family of four earning thirty thousand is above the absolute line. The relative test sets the line at sixty percent of a median of seventy thousand, forty-two thousand, and the same family is below it.
Where people slip
The one-third rule is the nineteen sixties' food share; food is a smaller share now, so the multiplier understates a modern budget, and the line stays because a changing definition would break every comparison over time. And a relative line can never be reached: there is always a bottom fifth.
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