Poverty and inequality

Absolute poverty

When a person has insufficient resources to meet basic human needs, e.g food, shelter and clothing.

Relative poverty

When a person’s income is lower than the average in that country/society.

Current international poverty line

$3.00 per person per day (Set by the world bank)

Measuring relative poverty

A poverty line is set, which is a percentage of average income.

Commonly, these poverty lines range from 40-70% of household income.

In the EU, people falling below 60% of median income are said to be at risk of poverty.

Problems with the concept of relative poverty

• It is highly subjective

• It changes overtime

• It cannot be used to make international comparisons

Measures of poverty

• The UN human poverty index

• Ratio method

The versions of the UN human poverty index

• HPI-1

• HPI-2

Both of these are composite measures which combine components such as life expectancy, literacy rates, long-term unemployment and relative income.

HPI-1

Used for poorest countries

• Focuses on basic deprivations like not living long, not being able to read/write and lack of basic necessities.

HPI-2

Used for developed countries.

• Includes relative measures such as inequality, unemployment and relative income because absolute deprivation is less common

Composite measure

Measurements based on multiple data items.

Causes of changes in absolute poverty and relative poverty

• The level of Indebtedness

• The level of unemployment

• Health or education

• Access to public services

• The state of the economy and real incomes

• Distribution of income

Income

A flow concept, the money earned by a person over a period of time

Wealth

The stock of assets a person owns

Income inequality

The unequal distribution of earnings between individuals

Wealth inequality

Difference in the value of stocks of assets owned by individuals

The Lorenz curve

A graphical representation of income distribution

The Gini coefficient

A numerical calculation of inequality based on the Lorenz curve

• A value of 0 being perfect equality

• A value of 1 being perfect inequality

Gini coefficient formula

G= A/A+B

• A represents the diagonal line between the Lorenz curve

• B represents the area under the Lorenz curve

• It can be represented as a percentage by multiplying it by 100 after the result

Causes of income inequality and wealth inequality within countries

• Globalisation

• Education, training and skills

• Wage rates

• Strength of trade unions

• Degree of employment protection

• Social benefits

• The progressiveness of the tax system

Causes of income inequality and wealth between countries

• Natural resources

• Geography

• History (Colonialism)

• Political stability

• Macroeconomic policies

• Amount of FDI by foreign countries

• Degree of technological change

Impact of economic change and deveSlopment on inequality - The Kuznets curve

• When an economy is at the early stage of development, and primarily agricultural, there is low inequality

• Industrialisation results in increased inequality, but at some point it starts to decrease

Significance of capitalism for inequality

This usually contributes towards inequality due to the difference in the amount of resources owned by individuals