4-2 Poverty and inequality

Question 1

What is absolute poverty?

Answer 1

• Absolute poverty is defined as living below subsistence.
• This means that the person is unable to meet their basic needs of food, clean water, sanitation, health, shelter and education.
• World bank measures as number of people living on less than $1.90 per day.

Question 2

What is relative poverty?

Answer 2

• Relative poverty is measured by comparison to the average in the country.
• In the UK, those with below 60% of the median income are considered to be in relative poverty.
• In the US, a basket of goods which maintains the average standard of living of society is used.

Question 3

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

Answer 3

• Inequality in wages or unemployment
• Government policy
• Disease, malnutrition and other health problems
• Wars, conflicts and natural disasters
• Corruption and political oppression
• Trade unions
• Economic growth

Question 4

What is wealth?

Answer 4

• Wealth is defined as a stock of assets, such as a house shares, land, cars and savings.
• Wealth inequality is the unequal distribution of these assets.

Question 5

What is income?

Answer 5

• Income is money received on a regular basis.
• For example, it could be from a job, welfare payments, interest of dividends.
• When income is unevenly distributed across a nation, income inequality is said to exist.

Question 6

What can be used to measure income inequality?

Answer 6

• The Lorenz curve measures the distribution of income and wealth in a country.
• The line of perfect equality shows the distribution of income when the richest x% of the population owns x% of the cumulative income.
• The Lorenz curve shows the actual distribution of income and wealth.
• The one in the diagram shows a significant level of inequality.
• The richest 20% own a higher proportion of income than the poorest.

Question 7

What is the Gini coefficient?

Answer 7

• The Gini coefficient give a numerical value for inequality and is derived from the Lorenz curve.
• It is calculated by the areas: A/A+B
• A value of 0 indicates perfect equality, so everyone has the same income and wealth.
• A value of 1 is perfect inequality i.e., all of the wealth in the country is concentrated in the hands of one individual or household.

Question 8

What are the causes of income and wealth inequality within and between countries?

Answer 8

• Inequality in wages
• Welfare payments and taxes
• Unemployment
• Changes to the UK tax system
• Inequality between countries

Question 9

What is the Kuznets hypothesis?

Answer 9

• Kuznets hypothesis states that as a society moves from agriculture to industry, so it develops, inequality within society increases, since the wages of industrial workers rises faster than farmers.
• Then, wealth is redistributed through government transfers and education.
• He initially argued that inequality in poor countries is just a transitional phase, and once nations become economically developed, inequality reduces.

Question 10

Who discredited this theory?

Answer 10

• Thomas Piketty in 2014 by arguing that the capitalist free market system inevitably leads to continued inequality.
• The rate of return on capital increases, so as the rich get richer with higher returns on their investments, inequality increases.

Question 11

What is Capitalism?

Answer 11

• Capitalism is a society where capital is privately owned, and workers are paid wages by private firms.
• There is minimal government intervention and resources are distributed according to the market.

Question 12

What significance does capitalism have on inequality?

Answer 12

• Entrepreneurs motivated through profits.
• Inequality motivates workers.
• Capitalism leads to monopoly power.
• Inheritance.
• Redistribution of wealth through government intervention.