4.2

Question 1

What is absolute poverty ?

Answer 1

• when a household does not have sufficient income to sustain even a basic acceptable standard of living/to meet basic needs
• World Bank has two extreme poverty lines
  1. below $1.90 a day (PPP)
  2. below $3.10 a day (PPP)

Question 2

What is relative poverty ?

Answer 2

• a level of household income considerably lower than the median level of income within a country
• UK relative poverty line is household disposable income less than 60% of the median income

Question 3

Absolute poverty context?

Answer 3

• data suggests extreme poverty is declining but not quickly enough to meet one of the sustainable development goals of absolute poverty being less than 3% of the global pop by 2030
• global extreme poverty fell to 8.6% in 2018 (about 1/2 of countries have extreme poverty rates below 3%)
• 41% of people in Sub Saharan Africa live on a per capita income of less than $1.90 a day (PPP)

Question 4

What is the concept of shared prosperity ?

Answer 4

• when economic growth increases the incomes and consumption of people in the poorest 40% of the pop.
• World Banks focuses on this

Question 5

Indicators of extreme poverty ?

Answer 5

• low & unstable household incomes
• absence of financial/welfare safety nets
• poor access to basic public & merit goods
• high unemployment/low unemployment

Question 6

Scale of poverty within the African economy (stats) ?

Answer 6

Sub Saharan Africa:
- 42% of pop live on < $1.90 a day PPP
- 66% of pop live on < $3.10 a day PPP

East Africa (Kenya, Rwanda, Ethiopia)
- 33% of pop live on < $1.90 a day PPP
- 55% of pop live on < $3.10 a day PPP

Question 7

What are the main causes of absolute poverty ?

Answer 7

1. pop growing faster then GDP: in low income countries = lower per capita incomes
2. severe savings gap (many families unable to save & live on less than $1.90 per day)
3. absence of basic public services eg. education & health care
4. corruption in govt & business
5. high levels of debt + having to pay high interest rates on loans
6. civil wars + natural disasters (= huge displacements of pop)
7. low rates of formal employments (vulnerable/insecure jobs & poverty wages)
8. absence of basic property rights eg. constrains ability to own land, claim welfare
9. lack of infrastructure - struggle to access markets, education & healthcare services

Question 8

What are the main causes of relative poverty ?

Answer 8

• income inequality
• shifts in the economy eg. tech advancements, globalisation - can lead to job displacement & wage stagnation
• unemployment & underemployment
• cuts in top rate income taxes (increases disposable incomes of richer households)
• surging executive pay & high rewards for skilled workers compared to other employees
• regressive effects of higher food & energy prices on poorer households
• deep market failures in access to good quality education, health & housing
• declining strength of trade unions in many countries + rising monopsony power

Question 9

What is income ?

Answer 9

• the returns that households receive as a result of providing their factors of production
• a ‘flow’ concept
• eg. wages, rent, interest payments

Question 10

What is wealth ?

Answer 10

• a measure of household/individual assets
• a ‘stock’ concept
• eg. stocks, bonds, land, machinery, real estate

Question 11

What is wealth inequality ?

Answer 11

• refers to how wealth is shared out amongst the population

Question 12

How is inequality of income & wealth correlated ?

Answer 12

• earning higher income allows households to buy more assets thus generating more wealth
• HOWEVER some households may have low income but have inherited wealth + pensioners often have very low income but might be regarded as wealthy if they own their homes or have large amounts of savings

Question 13

What are the measures of income inequality ?

Answer 13

• gini: a gini index of 0 represents perfect equality, while an index of 100 implies perfect inequality - provides a numerical measure of income w/higher values indicating greater inequality

Question 14

What does the Lorenz Curve show ?

Answer 14

• a graphical representation of income or wealth inequality which plots the cumulative % of total income/wealth against the cumulative % of pop
• the diagonal line shows a situation of perfect equality of income (ie. 50% of pop has 50% of income)
• the further away from the diagonal line that the Lorenz curve lies, the greater inequality
• area A/ area A + B

Question 15

Gini coefficient values ?

Answer 15

• 0: perfect equality
• 0-0.4: relatively equal society
• 0.4-0.6: relatively unequal society
• 0.6-1: perfect inequality

Question 16

What are the main causes of inequality within countries ?

Answer 16

1. big difference in wages & earnings in diff jobs/occupations
2. wage differentials caused by D&S side factors in the labour market
   - min educational qualifications required (barrier to entry of certain jobs)
   - varying scale of trade union representation & collective bargaining power w/employers
   - changing skill requirements of diff jobs eg. prompted by tech advances
3. unemployment
4. poor health & nutrition on employment opportunities & productivity
5. changes in taxation of income & wealth (incl. extent of progressive tax system)

Question 17

Trend between inequality between countries ?

Answer 17

• gap in per capita incomes between countries had been closing over the last 2 decades
• in party due to globalisation & the success of many developing/emerging nations had in raising their economic growth rates above pop. growth (so that per capita incomes improve)

Question 18

What are the main causes of inequality between countries ?

Answer 18

1. low life expectancy & fewer years of healthy life expectancy
2. low school enrolment rates (families cannot afford education)
3. low access to basic health care + poor nutrition (impairs brain development in youth)
4. vulnerability to loan sharks for families mired in debt (very high interest rates)
5. limited access to affordable technologies (digital divide)
6. much lower productivity leading to lower wages
7. low real spending power (limits the size of domestic markets)
8. low prices for primary commodities (small farmers have no bargaining power with transnational corporations)

Question 19

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

Answer 19

• economic changes impact the pattern of employment & the earnings available in different jobs & industries
• eg. globalisation has led to a ‘hollowing-out’ effect in a number of advanced countries (meaning there are more jobs in relatively unskilled work offering low rates of pay, fewer jobs in traditional full time jobs in heavy industry & more jobs in high knowledge occupations that require extensive qualifications offering premium pay rates)
• changes in savings
• reduction in consumer spending
• increased incentives as can earn more
• increased debt

Question 20

What does the Kuznets inequality curve suggest ?

Answer 20

• inequality often rises during a phase of rapid industrialisation & urbanisation BUT there may come a point when increased welfare provisions, progressive taxes & more balanced income growth across industries might lead to a fall in overall inequality at higher per capita incomes

Question 21

What are the main pillars of a free market capitalist economic system (significance of capitalism for inequality) ?

Answer 21

1. private property: people can own tangible assets eg. land & financial assets like shares
2. self interest: people act in their own self rational interest
3. competition in markets: assisted by the entry/exit of firms from industries
4. the price mechanism: prices in markets act as rationing, signalling & allocation devices
5. freedom of choice: from what to buy, which job to have, where to live
6. limited role for govt: eg. protect private property rights, maintain currency stability

Question 22

To what extent is a high income & consumption inequality an inevitable consequence of operating a capitalist system ?

Answer 22

1. the profit motive:
   - ✅ businesses assumed to be driven by the profit motive when making investment, output & employment decisions (profits flow as dividends to shareholders & inequalities of wealth can be widened as businesses list their shares on stock markets & investors can earn capital gains as well as dividend income)
   - ❌ HOWEVER, there are many motivated to run their businesses as social enterprises (profits reinvested for social/environmental purposes)
   - ❌ co-operative businesses (profits shared out between members) & has become more popular in recent years esp. after the global financial crisis
   - ❌ the govt can tax high profits & incomes through a progressive tax system (final distribution of income is less unequal)
   - ❌ competition policy & intervention by industry regulators can help control monopoly profits & keep real prices down for consumers
2. a capitalist labour market:
   - ✅ in competitive labour markets, wages & earnings are influenced by forces of labour D&S
   - ✅ in theory there are few limits to the achievable pay of top earners
   - ✅ at the lower end of the pay scale, the majority of people earning low wages are not represented by a trade union & have little to no bargaining power w/an employer
   - ❌ HOWEVER there are many possible interventions in the labour markets that can alter the final distribution of income & help to control inequality eg. min wage legislations, legal caps on executive pay, legal protections for employees (esp. in flexible jobs associated w/the Gig Economy)
   - ❌ govt investment in human capital promoting skills & employability of vulnerable groups in society can increase earnings potential

Question 23

What did Thomas Piketty argue ?

Answer 23

• rising inequality was an almost inevitable consequence of capitalism
• focused on the LR evolution of the ratio of capital to income, claiming that this will rise even further as the 21st C unfolds
• wealth will become more concentrated & inequality will rise
• Piketty shows that there has been a sharp rise in the ratio of wealth to income in the early 21st C to around 5 or 6 compared to just 2 to 3 in the 1950s/60s

Question 24

What do critics of Piketty argue ?

Answer 24

• over many decades capitalism has helped make the world a more equal place
• globalisation driven by increasing specialisation, trade & the diffusion of new technologies is helping to reduce extreme poverty & reduce the gap in per capita incomes between countries
  Paul Ormerod claimed that in terms of differences in per capita income levels between countries, the world is now more equal than it was in 1950 & probably around the same level that it was in 1850