4.2 Poverty & Inequality

Question 1

absolute poverty

Answer 1

• when individuals are unable to afford basic necessities for a healthy and safe existence, e.g. shelter, water, nutrition, healthcare
• defined by the World Bank as living on below $1.90 a day
• more prevalent in developing countries

Question 2

relative poverty

Answer 2

• relatively poorer than the median household income in the economy
• in the UK, this is below 60% of the median household income (2072/month)
• main form of poverty in developed countries

Question 3

causes of changes in absolute and relative poverty

Answer 3

• inequality in wages; more part-time / temporary jobs means more people are underemployed, thus limiting how much they can earn
• unemployment; decline of industries = job losses and structural unemployment which may lead to hysteresis (long-term)
• govt. policy; more regressive taxes, fall in value of state pensions, low wage increases for public sector workers, or falling real wages due to austerity policies all increase relative poverty
• health issues; makes it harder to get a job and is a huge issue in developing countries, e.g. in Sub-Saharan Africa as it can push them into absolute poverty
• wars / conflicts; can force people to flee and destroy what they own which forces them into extreme poverty
• trade unions; decline in their power means they’re unable to bargain for higher wages which increases relative poverty
• economic growth; higher EG in developing countries reduces absolute poverty

Question 4

difference between wealth and income inequality

Answer 4

• income inequality; unequal distribution (flow) of income to households, i.e. rent, wages, dividends, etc.
• wealth inequality; unequal distribution of assets that households own, such as a house, cars, land, savings, etc.

Question 5

measurements of income inequality

Answer 5

• the Lorenz curve; diagram 1; a visual representation of the inequality between households compared to a line of perfect equality
• Gini coefficient; a numerical value for inequality derived from the Lorenz curve, calculated by A/A+B - a value of 0 shows perfect equality and a value of 1 shows perfect inequality
• more equal income distribution is desired as it reduces poverty and social unrest
• perfect income distribution isn’t the goal as that would fully remove all incentives to work as everyone would be paid equally

Question 6

causes of income and wealth inequality within and between countries

Answer 6

• education/training/skills; higher skills=higher income, so a country with poor education will see greater inequality
• trade unions; countries with strong ones tend to have higher levels of income
• benefit system; countries with this raise the income of the lowest 20% of people, resulting in more equal distribution
• pension payments; ensures a minimum standard of living for retirees, resulting in a more equal distribution as countries without it have more pensioners living in poverty
• wage rates; e.g. NMW improves equity in distribution, as without it more households would be earning less
• tax structure; decreasing taxes on the lower end and increasing it on the upper end would mean the system is more progressive and there’s a more equal distribution of income
• asset ownership; the more equal asset ownership, the less inequality as assets generate income

Question 7

impact of economic change and development on inequality

Answer 7

• diagram 2
• Kuznets hypothesis states that as society develops from agriculture to industry, inequality within society rises as the wages of industrial workers rise faster than farmers
• then, wealth is redistributed through govt. intervention / support funded by increased state tax revenue brought about as a result of increased production in an economy
• after this turning point where inequality begins to fall, the economy becomes more developed and passes the transitional phase of increasing inequality
• this was discredited by Piketty, who said inequality still rises as the rich get richer

Question 8

significance of capitalism for inequality

Answer 8

• in a capitalist society (privately owned) entrepreneurs take risks and are driven by profit motives
• inequality is inevitable as workers with higher skills recieve higher wages
• individuals with higher income will acquire more assets leading to even higher levels of income - this will be hard for those on lower incomes
• long-term cost of capitalism is that relatively few individuals develop extreme wealth, at the expense of many who lose out
• capitalism requires govt. intervention to limit the income and wealth inequality that will naturally develop