Manifestations of a number of social and economic phenomena are commonly perceived as dichotomous: welfare-poverty, employment-unemployment, health-illness, etc. However these phenomena are intrinsically fuzzy, therefore a statistical analysis with binary variables oversimplifies reality and tends to wipe out all the nuances that exist between the two opposite extremes. Such a problem is especially relevant in the case of dynamic analyses on panel data, where the use of binary variables is required if one of the available discrete states models is to be applied. In order to avoid such a rigid simplification it is possible to follow a fuzzy approach which is coherent with the intrinsic nature of the studied phenomenon. This paper describes the dynamic model with fuzzy states proposed recently and already applied to the analysis of poverty and unemployment dynamics. Here we basically aim to deepen and develop its theory but we also present an application to the analysis of poverty dynamics in Great Britain from 1991 to 1997.