What is absolute poverty?

Absolute poverty is defined as when people earn so little that they cannot afford basic goods and services, leading to deprivation of necessities such as food and water. A person in absolute poverty is defined by the World Bank, in 2022, as anyone earning less than USD$2.15 a day. However, defining absolute poverty as falling below a constant real income level may overlook variations in living standards among different countries.

What is relative poverty?

Relative poverty is where a household's income is significantly below the average of the local area economy. In the UK in 2023, relative poverty is where a household earns less than 60% of the median household income.

What are the causes of changes in absolute and relative poverty?

Absolute poverty is likely to fall during periods of economic growth. This is because economic growth is likely to create more job opportunities, leading to increasing incomes and improving access to basic services. Moreover, effective government policies are also likely to reduce absolute poverty. For example, effective social welfare programs are likely to give people a basic level of income so that they can afford basic necessities. Improving access to healthcare and education will also likely lead to a fall in absolute poverty as individuals become healthier and more productive, enabling them to find work and gain access to higher incomes. 

Relative poverty is likely to rise when there is rising income inequality, as those with lower incomes fall further behind the average standard of living. Adjustments in social welfare programs can also affect the level of relative poverty, as altering the support available to those on low incomes may affect whether they fall into relative poverty.

What is the distinction between wealth and income inequality?

Wealth inequality is the unequal distribution of assets among individuals and households in the economy, whereas income inequality refers to the unequal distribution of earnings among individuals and households in the economy. 

What is the Lorenz curve?

This is a curve that shows the distribution of income or wealth within a population. 

In the example below, the cumulative share of total income held by the bottom x% is plotted against the cumulative share of the population, ranked from poorest to richest.

What is the Gini coefficient?

This is a statistical measure of income or wealth inequality. The Gini coefficient can be found by dividing the area between the line of perfect equality and the Lorenz curve by the area bounded by the line of perfect equality and the x-axis. A Gini coefficient of 0 reflects perfect equality, and a Gini coefficient of 1 reflects perfect inequality.

Hence, in the diagram above, the Gini coefficient can be found by the formula A/(A+B). 

What are the causes of wealth inequality within countries?

1. Inheritance. Some individuals may inherit large amounts of wealth, whereas some individuals may inherit nothing at all. 
2. Tax policies. Some tax policies may disproportionately benefit the wealthy, allowing them to accumulate more wealth through tax breaks and loopholes that are inaccessible to most of the population.

What are the causes of income inequality within countries?

1. Education and skills. Those with more qualifications and skills are likely to have better job prospects with higher wages than those without qualifications or skills. 
2. Discrimination. Discrimination based on factors such as race, gender or age may limit access to higher-paying positions for marginalised groups. This is illegal in the UK.

What are the causes of wealth inequality between countries?

1. Access to resources. A country which is rich in natural resources is able to build its savings by selling its natural resources. 
2. Historical factors. Some countries have suffered negative effects of their wealth being exploited when they were under colonial rule. Some countries may not have fully recovered.
3. Property rights. A country with poor property rights may receive little investment as the ownership of property may not be secure and legally recognised. Hence, as there is little investment, a country may struggle to build wealth.

What are the causes of income inequality between countries?

1. Differences in economic development. More developed economies typically offer higher wages compared to less developed nations.
2. Global trade dynamics. Unequal access to international markets and trade barriers can worsen income inequality between countries by favouring more economically powerful nations.

What is the impact of economic change and development on inequality?

Economic development may lead to a reduction in inequality. This is because economic development may create job opportunities and increase access to healthcare and education. 

However, there is the possibility that economic development may exacerbate inequality. This is because economic development may favour high-skilled workers over low-skilled workers. Hence, income and wealth may be more concentrated among those who already have lots of skills and have access to financial assets and opportunities.

What is the significance of capitalism for inequality?

Capitalism encourages entrepreneurship and allows individuals to start a business and increase their income and wealth, lifting people out of poverty and reducing inequality.

However, merit goods are typically underprovided in a capitalist system. This may lead to unequal access to education and healthcare, increasing inequality.