4.2 - Poverty and Inequality Content Flashcards
4.2 - Poverty and Inequality
What does the difference between HDI and IHDI represent?
The ‘loss’ in potential human development because of poverty.
4.2 - Poverty and Inequality
What is absolute poverty
When a household does not have sufficient income to sustain even a basic acceptable standard of living to meet peoples basic needs
Is a multi-dimensional about more than very low income per capita
World bank - less than $2.15 a day
4.2 - Poverty and Inequality
What is relative poverty
- Income compared to other people - those living below a certain threshold income.
- In the UK and the EU, a household is in relative poverty if they are living in a household with income below 60% of median household income.
- Poverty line for a single working age adult is £141 a week.
- Around 1/5 of people in the UK live in relative poverty.
4.2 - Poverty and Inequality
Causes of Absolute Poverty
- Population growing faster than GDP in low income countries leading to lower per capita incomes
- A severe household savings gap – many families unable to save and living on less than $1.90 per day – poverty trap
- Absence of basic government/public services such as education and universal care, welfare system
- Effects of endemic corruption in government and business
- High levels of debt and having to pay high interest rates on loan
- Damaging effects of civil war and natural disasters both lead to huge displacements of population
- Low rate of formal employment - people in insecure jobs with poverty wages
- Absence of basic property rights, lack of which may constrain ability to own land
The causes are often complex and multi-causal
4.2 - Poverty and Inequality
Causes of Relative Poverty
- Cuts in top rate income taxes, the wealthy get wealthier
- Surging executive pay and high rewards for skilled workers compared to other employees
- Regressive effects of higher food and energy prices on poorer households
- Deep market failures in access and affordability of good quality education, health & basic housing
- Declining strength of trade unions in many countries and the rising monopsony power of some big employers
4.2 - Poverty and Inequality
What is the UN’s Multi-Dimensional Poverty Index (MPI), and what key insights does it provide?
The Multi-Dimensional Poverty Index (MPI) measures poverty beyond income by assessing deprivations across 10 indicators in health (child mortality), education (years of schooling), and standard of living (Access to drinking water). Key findings (2019):
* 23% of people (1.3 billion) in 101 countries lived in multidimensional poverty.
* Two-thirds of these individuals reside in middle-income countries.
* Over half are under 18, highlighting youth vulnerability.
The MPI evaluates progress against sustainable development goals to reduce severe deprivation in emerging and developing nations.
Why does Piketty argued more eco. development eventually increases inequality?
Due to the higher rate of return on capital.
(Rich get richer e.g. can mortgage more houses to rent out).
4.2 - Poverty and Inequality
What is the Lorenz curve?
A visual indicator of inequality in an economy.
4.2 - Poverty and Inequality
How is the Gini coefficient calculated?
Gini Coefficient = Area of A / Area of A + Area of B.
4.2 - Poverty and Inequality
What Gini coefficient value represents perfect equality? Perfect inequality?
0
1 or 100
4.2 - Poverty and Inequality
What are the two types of lorenz curves?
Income inequality
Wealth inequality
4.2 - Poverty and Inequality
What are the two types of lorenz curves?
% of income = y
% of population = x
4.2 - Poverty and Inequality
What is the Gini coefficient?
A numerical indicator of wealth and income distribution and inequality.
4.2 - Poverty and Inequality
Draw a lorenz curve showing a reduction in inequality:
4.2 - Poverty and Inequality
What are cause of inequality within countries
- Education, training and skills
- Trade unions
- Benefit system
- Pension payments
- Wage rates
- Employment Legislation
- Tax Structure
- Asset Ownership
4.2 - Poverty and Inequality
How is Education, Training and Skills a cause of inequality within countries
- The higher the skill level the higher the level of income.
- A country with a poor education system will see greater inequality than one with a good education system
- Education being a barrier to entry to a job
4.2 - Poverty and Inequality
How is Trade Unions a cause of inequality within countries
- Countries with strong trade union membership tend to have higher levels of income.
- With low trade union membership, the exploitation of workers through low wages is easier
4.2 - Poverty and Inequality
How is a benefit system a cause of inequality within a country
Countries that provide a range of benefits (such as unemployment, disability, child support, housing support etc) raise the income of the lowest 20% of the population resulting in more equal distribution
4.2 - Poverty and Inequality
How is pension payments a cause of inequality within a country
- State pension payments ensure a minimum standard of living for retirees resulting in a more equal distribution of income.
- Countries without it have a much higher percentage of pensioners living in poverty
4.2 - Poverty and Inequality
How is wage rates a cause of inequality within a country
- 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
4.2 - Poverty and Inequality
How is employment legislation a cause of inequality within a country
Generally, the more workers are protected by law, the better the income distribution in an economy e.g. maternity benefits ensure that new mothers have a higher level of income during the first months of leave after a birth
4.2 - Poverty and Inequality
How is tax structure a cause of inequality within countries
- Progressive tax systems allow all income earners to contribute to public revenue according to their ability.
- Decreasing taxes on the lower end and increasing it on the upper end would mean that the system is more progressive and there would be a more equal distribution of income
4.2 - Poverty and Inequality
How is asset ownership a cause of inequality within countries
- Assets generate income.
- The more equal the asset ownership in an economy the less the inequality in income distribution.
- This was one reason why the UK government changed the law in 1980 allowing council house tenants the right to buy their property at a discounted rate.
- It is also a reason for the current shared ownership scheme
4.2 - Poverty and Inequality
Causes of inequality between countries
- Low life expectancy and fewer years of healthy life expectancy
- Low school enrollment rates – families can’t afford it – widens gender opportunity gap
- Low access to basic health care and poor nutrition - impairs brain development among young people
- Vulnerability to loan sharks/access to credit
- Limited access to affordable technology – digital divide – been decreasing, more smartphone use
- Much lower productivity which then leads to lower wages
- Low real spending power limits the size of domestic markets for goods and services
- Low prices for primary commodities – small farmers have little to no bargaining power
4.2 - Poverty and Inequality
What is the Kuznets hypothesis?
Inequality increases as an economy develops and moves from agriculture to industry.
Then it improves through rebalancing (by the govt.). + inequality falls.
4.2 - Poverty and Inequality
Give the Kuznet hypothesis curve:
Inequality against economic growth
4.2 - Poverty and Inequality
What is the evaluation to Kuznet’s hypothesis?
Piketty theory
4.2 - Poverty and Inequality
What are the consequences of poverty and inequality in developing countries?
- Low savings ratio – this affects firms ability to invest and expand.
- Balance of payments problems – those people on high incomes in the cities may spend it on large volumes of imports because they have a Westernised life style. This in turn can lead to a balance of payments deficit.
- Lack of entrepreneurship – the poor will have no capital to start their own business and better themselves because their incomes are not high enough to save.
- Absolute poverty could remain high – because of a lack of spending power in the economy and the lack of job creation. Also tax revenues are low, so there is no money to provide merit goods like education and health or develop infrastructure.
- Capital flight – in developing countries the very wealthy may transfer their assets to ‘safe havens’ (see section 14.5)
- Social problems – crime, political instability.
4.2 - Poverty and Inequality
What is the significance of capitalism for poverty and inequality?
- Capitalism creates inequality because it requires incentives for it to work - e.g. entrepreneur = profit; workers = wages
- Entrepreneur & workers rewarded according to risk, productivity and ability - But capitalism not just about creating inequality…
- Wealth, tax revenue and jobs it creates has lifted living standards for all and millions out of poverty - Relative poverty still a problem in developed countries
4.2 - Poverty and Inequality
To what extent is high income and consumption inequality an inevitable consequences of operating a capitalist system
High income and consumption inequality can be a natural outcome in capitalist systems due to two main factors:
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Profit Motive
- Firms focus on maximizing profits, often leading to significant dividend flows to shareholders, which can widen inequality.
- Some businesses, however, pursue a social enterprise model, reinvesting profits for social or environmental benefits.
- Mitigating measures include progressive taxation on high profits and incomes, as well as competition policies to limit monopoly behavior and keep consumer prices low.
-
Labour Market Dynamics
- Wages in competitive markets are determined by supply and demand, which can allow top executives and scarce-skill workers to command very high pay, while low-wage workers without strong bargaining power see little improvement.
- Interventions such as minimum wage legislation, legal caps on executive pay, stronger employee protections (especially in gig and flexible jobs), and government investment in human capital can help balance the distribution of income.
4.2 - Poverty and Inequality
What did piketty argue
Thomas Piketty’s core argument is that capitalism naturally leads to rising wealth inequality over time. He uses historical data to show that when the return on capital (profit from wealth, e.g., rent, dividends, or investments, abbreviated as r) is higher than the economic growth rate (growth of incomes/output, abbreviated as g), wealth concentrates in the hands of those who already own assets.
4.2 - Poverty and Inequality
Critics of Piketty
Critics of his say that capital has helped to make the world to make the world more equal. Point of the impact of globalisation driving by increasing specialisation, trade and the diffusion of new technologies as helping to reduce extreme poverty and reduce the gap in per capita incomes between countries. World is now more equal than it was in 1950, around the same levl as 1850
