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An asset index is a proxy measure for the economic wellbeing of a household (Sahn and Stifel, 2003). In cases where consumption and expenditure data are not available, an asset index is often used (Filmer and Pritchett 2001; Carter and Barrett 2006). This approach is argued to be a better measure than consumption or income since it is more stable over time (Carter and Barrett, 2006; Michelson et al., 2013). It provides a relative measure of poverty for each household and may be used to complement consumption-based poverty measures.
How to operationalize the metric
Method of data collection and data needed to compute the method:
Data to operationalize this indicator are obtained by survey. Surveys such as the LSMS and Demographic Health Survey (DHS) contain sections that collect data used to compute this metric. These data include (but are not limited to): ownership of productive assets (bicycle, motorcycle, TV, vehicle, mobile phone); roofing, wall, and floor materials used on the main dwelling; and type of sanitation facilities (for a comprehensive list, see Vyas and Kumaranayake, 2006; Rutstein, 2008). These assets are normally catalogued in the household survey questions about asset ownership--a list of assets is provided for the household to indicate which and how many of them they own . The questions asked are :
- How many [asset] does your household own?
- What is the age of the [asset]?
- At what price did you buy [asset]?
- If you wanted to sell [asset] today, how much would you receive?
Unit of analysis:
Once the data on the items has been collected then proceed to calculate the asset index.
First, tabulate the list of assets by frequency of ownership by households in the sample. If the asset is owned by more than 95% of the households or less than 2% of the households, it is advised to remove them from the list since they will exhibit little variation. The percentage of ownership is a value judgement and may depend on the sample size.
Secondly, run the principle component analysis on the list of assets in order to reduce the dimensionality into a single asset score. It is recommended to use the first principle component that explains the most variance in the data. Using multiple components may add additional complexity in explaining the asset factors (Mckenzie 2005; Vyas and Kumaranayake 2006; Filmer and Prichett, 2001).
The factor scores from the first component are used as weight for each asset to construct an asset index for each households. The higher the household asset index score the higher the households relative economic status in that area (village or sample). Household asset indices are normally stratified into wealth quintiles (Rutstein, 2008 ), deciles or terciles depending on the study.
The DHS also provides a step by step information on construction of an asset index if another source is needed (http://www.dhsprogram.com/topics/wealth-index/Wealth-Index-Construction.cfm ) plus Rutstein et al. (2004) ( http://www.dhsprogram.com/programming/wealth%20index/Steps_to_constructing_the_new_DHS_Wealth_Index.pdf )
Limitations regarding estimating and interpreting:
The asset index is used as a relative measure of poverty among households and does not provide an absolute measure of poverty with in a community or across years. The index can help to measure the relative evolution of the household’s asset wealth over time in the community compared to other households but cannot assess if one group is poorer or richer in absolute sense.