The selection of an appropriate level of welfare is reflected in the choice of a cut-off or poverty line. Apart from the selection of poverty line the measurement of poverty generally focuses on computing three indices. These reflect:
a) The prevalence or incidence of poverty as measured by the fraction in the total population living below the poverty line i.e. the head-countb) The intensity of poverty reflected in the extent to which the income of the poor lies below the poverty line, as measured by the differences between the two i.e. the poverty gap;
c) The degree of inequality among the poor, in such a way that income transfers from the worse off among the poor to the less poor should raise measured poverty and vice versa i.e. the severity of poverty index.
Foster, Greer and Thorbecke (1984) have suggested a useful general index that meets these requirements. Their class of poverty indices takes the following form:
where Zp denotes the poverty line, Yi the expenditure or income of the i-th poor household (or individual), N the total number of households and q the number of households whose expenditures or incomes are below the poverty line.
This index is based on measuring the gap between the poverty line and the expenditure or income of the poor as a fraction of the poverty line [Zp - Yi]/Zp, raising it to a power a and then summing over all poor units. Not only does the index take into account the prevalence and intensity of poverty, it may also be used to reflect the degree of inequality among the poor by varying the value of the ex parameter.
Thus, if a =0, index Pa becomes: P0 = q/N, which has been referred to as the head-count index. It reflects the proportion of total population lying below the poverty line, i.e., the proportion of poor in the total population. This measure is indifferent to the extent of poverty of the poor. It is only sensitive to their number and reflects the prevalence of poverty.
Alternatively, with a = 1, the poverty index Pa becomes:
where I is the "income gap ratio", i.e., the mean income gap of the poor 
- where 
is the mean expenditure (income) of the poor expressed as a fraction of poverty line. Thus, P1 is the income gap ratio multiplied by the head-count index. This index, gives a good measure of the extent or intensity of poverty as it reflects how far the poor are from the poverty line. It may also be used to show the amount of income, under perfect targeting, that needs to be transferred to the poor to close the poverty gap in order to eradicate poverty. However, P1 is insensitive to income distribution among the poor. Income transfers between the poor will leave P1 unchanged. For this to be reflected in the index, greater weight has to be given to the poorest units. This can be achieved by setting a = 2.
If a =2, the poverty index becomes71
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Lipton M. and Jacques van der Gaag. 1993. Including the Poor. World Bank/IFPRI
P2 is the mean squared proportionate poverty gap. This index is not easy to interpret as compared to P0 and P1, however, it has the advantage of reflecting the degree of inequality among the poor, in the sense that the greater the inequality of distribution among the poor and thus the severity of poverty, the higher is P2.
This class of poverty indices is additive, it permits the summing up of poverty indices for various subgroups in the population.
