4.2.1 & 4.2.2 Absolute And Relative Poverty & Inequality Flashcards
Absolute poverty
When a person’s continued daily existence is threatened as they have insufficient resources to meet their basic needs
Absolute poverty example
The world bank defines absolute poverty as living on below $2.10 a day.
- one in six people worldwide
Relative poverty
When a person’s standard of living is low compared with the average person in the same country
Relative poverty example
Households are considered to be below the UK poverty line if their income is 60% below the median household income after housing costs for that year.
Things that affect poverty
- employment levels
- levels of training & education -> wages
- health (physical or mental - ability to work)
- dependency (on people or state)
- inheritance (cycle of poverty- rich stay rich)
- levels of physical or intellectual capital in your country
- state of infrastructure in your country
- govt policy (pensions, housing, welfare, education, NHS, childcare, training, tax wages)
Income
(Flow concept)
Get income from land, labour, capital & enterprise
- propert rented out
- payment for work done (wages)
- shares in a business (profit)
- own a business (profit)
What we own
- Human capital
- Physical capital
- Financial capital
Sources of wealth
- Inheritance
- Saving
- Entrepreneurship
- Chance
Wealth inequality causes
- Inheritance
- Marriage
- Income inequality
- Chance
Causes of income distribution
Economic growth will reduce income inequality
- Wages of the lowest paid rise faster than the average wage
- Govt benefits are increased
- Econ growth creates job opportunities
- Minimum wages are increased
- Progressive taxes redistribute income
Economic growth will reduce income inequality (govt benefits increase)
Government benefits, such as; unemployment benefits, sickness benefits and pensions are increased in line with average wages.
Economic growth will reduce income inequality (econ growth creates job opportunities)
Economic growth creates job opportunities which reduce the level of unemployment. Unemployment and lack of employment are one of the biggest causes of relative poverty.
Economic growth will reduce income inequality (progressive tax redistributes income)
Progressive taxes redistribute income. Progressive taxes such as higher rates of income tax will take a higher percentage of income from the rich; this can be used to fund social spending, such as health care, education and welfare benefits which help to reduce income inequality.
Why economic growth may not reduce income inequality?
- Econ growth creates job opportunities
- Interest-bearing wealth
Why economic growth may not reduce income inequality? (Econ growth creates job opportunities)
Economic growth often creates the best opportunities for those who are highly skilled and educated.
- In recent years, in the UK, we have seen faster wage growth for highly paid jobs than unskilled jobs.
Why economic growth may not reduce income inequality? (Interest-bearing wealth)
The wealthy gain interest and dividends from their assets.
- This rent, interest and dividends = re-invest in increasing their wealth.
- For the wealthy, it is a wealth creating cycle – which increases their share of income.
- The economist Thomas Piketty argued that without government intervention the rate of return from wealth would lead to widening income and wealth inequality.
Problems of inequality
- Inequality arising from monopoly power
- Social problems
Problems of inequality (inequality arising from monopoly power)
If firms have monopoly power, they are in a position to set higher prices to consumers. This leads to a redistribution of income from consumers to the shareholders of monopolies. Here, the inequality is based on an unfair distribution of power in society. Even Adam Smith argued the government needed to regulate monopolies.
Problems of inequality (social problems)
Arguably inequality can lead to social friction. It can be a factor in precipitating riots or higher crime levels. In this case, all members of society lose out. This is more pressing if the inequality is perceived to arise out of unfair allocation of opportunities (e.g. inherited wealth, monopoly power)
Advantages of inequality
- Incentive effect
- Trickle down effect
Advantages of inequality (incentive effect)
If someone works harder and as a consequence receives a higher wage then this is not market failure. The promise of a higher wage is essential to encourage extra effort. By rewarding hard work, there will be a boost to productivity leading to a higher national output – so everyone can benefit.
Advantages of inequality (trickle down effect)
If some people gain extra income, then this can ‘trickle down’ to other people, e.g. if an entrepreneur sets up a business he may become a millionaire, but also will create jobs and provide incomes for other workers. There may be a gap between the highest and lowest earners. But, the lowest earners are still better off than without the entrepreneur. (more on trickle-down effect – which is quite controversial)
Causes of income distribution between households
- less tax on tax earners
- less nationalism (more executives)
- less real value of benefit
- geographical distribution
Causes of income distribution between households (geographical distribution example)
Italy & Germany (West Germany is wealthier than East)
Causes of income equality between households
- impact of state
- wealth inequality
- household composition
- level of skills & qualifications
- differences in earning
Causes of income equality between countries
- education/training
- wage rates
- level of employment
- social benefit
- tax system (progressive or not)
- inheritance & asset ownership (e.g houses)
- pension entitlements
- structure of economy
- political factors & strength of trade unions
- globalisation
Significance of capitalism for inequality
- inequality in a free market economy is inevitable, since ppl with higher skills = attract higher wages
- inequality is essential in a capitalist system in providing an incentive for individuals to rake risks for profit
The existence of private ownership
- some people will acquire considerably more assets than others = generate income = wealth inequality = reinforces income inequality
- this growing perpetuating inequality reduces meritocracy = harms the economic incentive as the gains are only available for a very few, who were originally born into their wealthy.
Kuznets explanation
- industrialisation = increased inequality as workers move from the lower productivity & lower paid agricultural sector into the higher productivity manu sector since increases their wages relative to those working in agriculture
- however, at some point, inequality decreases since gov have more resources to redistribute income through tax and benefit system (progressive tax system)
The Lorenz curve
Measures and illustrates the degree of inequality in the distribution of income
- the further away the urge is from the line, the more unequal the distribution
The Lorenz curve graph
Gini coefficient
- a statistical measure of the degree of inequality shown on a Lorenz curve
- if 0, there’s perfect distribution of income (everyone earns the same amount)
- if large (almost 1) =. Uneven distribution since there’s a large mass of poor people who are jealous of the small no. Rich
Difference between economic growth and economic development
- Economic growth is an increase in production within the economy (our living standards are influenced by our access to goods and services).
- Economic development is an increase in people’s wellbeing, welfare and quality of life. For example, reducing poverty levels, income inequality, improving education standards.
Gini coefficient of developed countries
- UK 2021: 0.34
- Germany 2021: 0.31
Gini coefficient of developing countries
- Hungary 2021: 0.28
- Egypt 2017: 0.32
Finland’s basic income experiment
- Finland undertook a two year trial from 2017 of modest monthly payments of £477 to 2,000 unemployed ppl
- it found an increase in wellbeing but little noticeable impact on employment
Universal Basic income
when all adults receive a no-strings-attached amont of money from the state to cover the basic cost of living
Advantages of a universal basic income
- a direct way of reducing absolute poverty & lifting personal freedom & security
Advantages of a universal basic income
- reduce absolute poverty
- greater income stability and investment
How can UBI reduce absolute poverty?
- a direct progressive way of reducing absolute and relative poverty & lifting personal freedom and security
- reducing exposure to very high interest debt & risks of needing emergency food bank support
- avoids the sitgma attached to welfare benefits
- can lead to less welfare spending
How can UBI increase income stability?
- UBI is seen as way of getting money into the hands of the working poor * reducing poverty where the future of work seems increasingly insecure e.g. from robots and artificial intelligence
- Creativity in the workplace might be improved as people may have greater income stability and be more inclined to take risks.
Evaluation of UBI
- effectiveness (finland)
- opportunity cost
- alternatives (mayybe freely accessible public services such as childcare & transport)
- work incentives
Opportunity cost of UBI
money invested in cash transfers cannot be invested elsewhere unless public borrowing/debt rises too
Example of absolute poverty in sub sahran Africa
- 42% of population < $ 1.90 a day
