Chapter 4 Multidimensional Indices

Inequality and poverty can be seen as multidimensional concepts, combining several livelihood characteristics. Usual approaches take into account income, housing, sanitation, etc.

In order to transform these different measures from into meaningful numbers, economic theory builds on the idea of utility functions. Utility is a measure of well-being, assigning a “well-being score” to a vector of characteristics. Depending on the utility function, the analyst may allow for substitutions among characteristics: for instance, someone with a slightly lower income, but with access to sanitation, can have a higher wellbeing than someone with a higher income, but without access to sanitation. This depends on the set of weights given to the set of attributes.

Most measures below follow from this kind of two-step procedure: (1) estimating individual scores from an individual’s set of characteristics; then (2) aggregating those individual scores into a single measure for the population.

The following section will present measures of multidimensional poverty and inequality, describing the main aspects of the theory and estimation procedures of each.