4.2 - Poverty & Relative Poverty (Edexcel A-level Economics Theme 4)

Absolute poverty w/examples

Absolute poverty is a situation where individuals cannot afford to acquire the basic necessities for a healthy and safe existence

e.g shelter, water, nutrition, clothing and healthcare

Main poverty that affects developing countries

What did the world bank define absolute poverty as?

• In 2022, the World Bank defined absolute poverty as anyone who was living on less than $2.15 a day

Relative poverty

Incomes below a given average in society/ Relative poverty is a situation where household income is a certain percentage less than the median household income in the economy

Main poverty that affects developed countries

What did the UK define relative poverty as?

• The UK defines relative poverty as households that are living with less than 60% of the median household income

How can absolute poverty decrease even while income inequality increases?

This means that the income of wealthier households is rising faster than the income of the poorer households

Causes of changes in absolute poverty?

• Strong correlation between economic growth and a decrease in absolute poverty

  • Economic growth increases household incomes

• Government tax and benefit policies can support the most vulnerable groups in society e.g. children, pensioners, people stuck in long-term unemployment

  • In developed economies, benefit policies can ensure that no household is living in absolute poverty

Causes of changes in relative poverty

• Rising asset prices can decrease relative poverty in households which own their own properties

  • Asset prices often increase faster than wages or income

• Trade liberalisation expands markets and output, boosting labour demand and wages, reducing relative poverty through a multiplier effect. However, reduced government benefits can lower incomes and increase relative poverty.

Equity

Fair distribution of income

Equality

Equal distribution of income

Causes of poverty (10)

• Unemployment - structural and cyclical

• Poor education/skills

• Poor health/healthcare

• Born into poverty

• Tax cuts for the rich

• Subsistence agriculture

• Natural disasters

• Corruption

• Wars and conflict

• Regressive taxes

What is income inequality?

• Income inequality refers to the unequal distribution (flow) of income to households i.e rent, wages, interest and profit

What is wealth inequality?

• Wealth inequality refers to differences in the amount of assets that households own

What are the 2 measurements of inequality?

Lorenz curve - visual indicator
Gini coefficient - mathematical indicator

What is the analysis for this diagram?

• The line of equality represents perfect income distribution (not desirable)

• In the UK the bottom 20% of households receive 5% of the income flow while in Sweden they receive 9% of the income flow

• In the UK the top 10% of households receive 45% of the income flow while in Sweden they receive 25%

• Sweden has a more equal distribution of income than the UK (Sweden = Red line, UK = Green line)

What is the gini coefficient?

Measures the distribution of income in a population. The closer the value is to 1, the worse the income inequality

What is the analysis for the diagram?

• Gini Coefficient = A/A+B

• A represents the area between the line of equality and the UK Lorenz curve

• B represents the area under the Lorenz curve

• A value of 0 represents absolute equality (socialism) and 1 represents perfect inequality

• In 2022, the USA coefficient was .41 as compared with the UK value of .35

  • The distribution of income in the UK was more equitable than in the USA

Causes of income and wealth inequality? (8)

1. Education, Training and skills

2. Trade unions

3. Benefit system

4. Pension payments

5. Wage rates

6. Employment Legislation

7. Tax structure

8. Asset ownership

What is meant bby education, training and labour?

Higher skill levels lead to higher incomes. Countries with poor education systems face greater income inequality compared to those with strong education systems.

What is meant by trade unions?

Countries with strong trade union membership typically have higher incomes, while low union membership makes worker exploitation through low wages more likely.

What is meant by benefit system?

Countries offering extensive benefits (e.g., unemployment, disability, and housing support) increase incomes for the lowest 20% of population, leading to a more equal income distribution.

What is meant by pension payments?

State pension payments provide a minimum standard of living for retirees, promoting more equal income distribution. Without them, a higher proportion of pensioners live in poverty.

What is meant by wage rates?

• The purpose of a national minimum wage is to improve the equity in the distribution of income.

• Without it, more households would be earning less and inequality would increase

What is meant by employment legislation?

Stronger worker protections, such as maternity benefits, improve income distribution by ensuring higher incomes during periods like maternity leave.

What is meant by tax structure?

Progressive tax systems ensure contributions based on ability to pay. Lowering taxes for low-income earners and raising them for high-income earners increases progressivity, promoting more equal income distribution.

What is meant by asset ownership?

Assets generate income, so more equal asset ownership reduces income inequality. The UK encouraged this by allowing council house tenants to buy properties at a discount (1980) and through current shared ownership schemes.

Why does industrialism result in inequality?

Some workers move from the lower productivity, lower paid agricultural sector into the higher productivity manufacturing sector

• There is now greater income inequality with the workers left behind

Why is inequality under capitalism inevitable?

• Workers with higher skills receive higher wages

• Workers with little to no skills receive little to no wage

• Individuals with higher income will acquire more assets leading to higher levels of income

  • In turn, they can keep on acquiring assets

1 Pro and 1 Con of capitalism in regards to inequality?

• The incentive to acquire income raises productivity and output

• The long-term cost of capitalism is that the factors of production become concentrated in ownership with relatively few individuals developing extreme wealth, at the expense of many who lose out