Vertical and horizontal inequality and poverty.

The following figure shows a scatter plot of household expenditures in Benin for 1996 and 1999.

  1. The difference in the observed inequality between the two periods can be decomposed into vertical and horizontal inequality


  • y0                 : Vector of incomes of the initial period

  • y1                 : Vector of incomes of the final period

  • E(y1|y0)     : Vector of the expected incomes in the final period

One can then decompose the observed variation in poverty into vertical and horizontal components of inequality such that:


  • V component is the variation in poverty explained by vertical inequality

  • H component is the variation in poverty explained by horizontal inequality

To compute all these components, we can use DAD to:

  1. Generate the vector E(y1|y0). For this:
    •  use the application : Distribution=> non parametric regression
    • choose the appropriate vectors and parameters and click on the button GENERATE.


  1. Once that this vector is generated, one can use the application Poverty=FGT Index (with 2 distributions) to finalise the computation.