4.2.1 - Absolute and relative poverty

Question 1

Define absolute poverty

Answer 1

a condition where household income is below necessary level to maintain basic living standards (food, shelter, housing, clean water, sanitation)

Question 2

Define relative poverty

Answer 2

A condition where household income is a certain percentage below median incomes. The official UK relative poverty line is household disposable income (adjusted for household size) of less than 60% of median income

Question 3

What does WB define as absolute poverty

Answer 3

The World Bank defines anyone living on less than US$1.90 a day as living in
absolute poverty.

Question 4

UK poverty

Answer 4

In the UK, an estimated 14.5 million people are living in poverty, which represents 22% of the population. Of these, 4.3 million are children

Question 5

Describe the poverty trap

Answer 5

• this affects those relying on state benefits or those on low ages and means tested benefits
• when people earn a higher wage they only actually receive a small percentages of their wage increase becuase they need to oay income tax and NI contributions and have their benefits reduced bc they now earn more
• this could even drop their dispo income and their marginal tax rate will be high
• so income tax combined with NI and benefits system create disincentve for peopel to find work or increase their hours of work

Question 6

Difference between equity and equality

Answer 6

• equity: fair distribution of income
• equality: equal distribution of income

Question 7

How does wage differentials cause growth in relative poverty?

Answer 7

• wage growth for high skilled professions has outpaced the rest of the labour market in recent decades.
• This has caused the median income to rise.
• Concurrently, wages for medium skill work have barely rise and those at the bottom have faced wage stagnation.

Question 8

Evidence of wage differentials in 2022

Answer 8

• cost of living crisis - inflation peaked at 11% in 2022
• based on payroll data collected by HM Revenues & Customs, which include bonuses, show that for the top 1 per cent of employees, pay rose by more than 7 per cent in real terms between December 2019 and March 2022. For the 10th-lowest paid, real-terms wage growth was just over 2 per cent.
• In two other high-paying sectors — professional services and IT — pay growth was almost as strong, at 21 per cent, and was driven by pay rises at the top
• average earnings in finance were 25 per cent higher in cash terms in March than the pre-coronavirus pandemic level, outstripping the 15 per cent growth seen over the same period in mean earnings across the economy as a whol

Question 9

How does regressive tax cause relative poverty

Answer 9

• Tax changes in the 1980s and 1990s have put a higher burden of tax on the poor. There has been a shift in taxes from progressive income tax to regressive, indirect taxes, therefore causing an increase in inequality.
• For example, the top marginal rate of income tax has fallen from 83% in 1979 to 40% in 1989. The basic rate has come down from 33% to 22%.
• However, the overall tax burden has remained unchanged because the govt has increased VAT and indirect taxes on alcohol and petrol and extending VAT to domestic fuel. These taxes take a higher % from those on low incomes

Question 10

Describe fiscal drag

Answer 10

• Jeremy hunt
• top rate of tax was cut from 50% to 45% in 2013-2104 and frozen tax bands allows incomes to rise in line with inflation so those with rising incomes enter a higher tax band as they are frozen, thus fiscal drag occurs whereby individuals now pay more tax due to frozen tax bands
• evidence shown recently: as a result of frozen thresholds since 2020, proportion of tax payers paying higher rate of tax has icnreased from 12.2%to 28% (projected) over four years (2024 projection)

Question 11

Natural disaster causing absolute poverty

Answer 11

Natural disasters such as floods and earthquakes can result in severe
economic disruption and large numbers of fatalities. Therefore, the factors of production deteriorate resulting in negative economic growth and falling living standards. Securing food, shelter and employment can become a long-term problem for many people resulting
in increased poverty.

Evaluation:
1) depends on intensity of the natural disaster.
2) Depends on how effective the country is able to conduct response e.g. Japan was able to recover more swiftly and successful from the tsunami in 2011 than Haiti was when an earthquake struck there in 2010.

Question 12

Corruption causing relative poverty

Question 13

Evaluate corruption as a reason for relative poverty

Answer 13

• corruption appears to surmountable if the government has an overall growth
  strategy that allows countries to move up the value chain
  e.g. China, South Korea and Japan are all countries with endemic corruption problems but successive governments have
  fostered export-led growth that has resulted in economic development and lifted hundreds of millions of people out of poverty.
• china ranks 45 (100 is clean) on CPI but lifted 800 million out of absolute pvoerty over the course of four decades through deng xiaoping’s economic refordm in 1978

Question 14

What were deng xiaoping’s main economic reforms

Answer 14

• Decollectivization and higher prices for agricultural products also led to more productive (family) farms and more efficient use of labor. Together these forces induced many workers to move out of agriculture. The resulting rapid growth of village enterprises has drawn tens of millions of people from traditional agriculture into higher-value-added manufacturing
• open door policy ne result was an influx of foreign companies with resources that made them powerful competitors in the international marketplace. The changes also triggered an upsurge of entrepreneurial activity within China and foreign direct investment in china surged
• he opened special economic zones in Shenzhen, guangdong and Zhuhai and other places - including Shanghai. These SEZs had tax and business incentives x tax exemptions, reduced custom duties, cheaper land and increased flexibility to negotiate labour contracts

Question 15

how does corruption cause relative poverty

Answer 15

• living standards tend to be lower in countries with high levels of corruption
  because government officials and business owners are more likely to engage in rent seeking:
• For example, business owners may collude with each other to keep prices high and limit spending on research and development.
• They may even
  bribe public officials into conniving this collusion. This will keep profit high for these businesses but will constrain economic growth. Rises in income and employment will also be limited.

Question 16

Define rent seeking

Answer 16

aiming to increase one’s share of existing wealth without creating new wealth

Question 17

Minimum wages a cuase of change in relative poverty

Answer 17

• minimum wages increase the wages of low skilled workers – potentially to or above 60% of median income.
  In the 2019 General Election, Chancellor
  Sajid Javid announced plans to raise UK minimum wages to two-thirds of medium earnings in five years. The UK already has a relatively high minimum wage (foruth highest in the world)

Question 18

Apply corruption to compare poverty in two similar countries

Answer 18

Norway and Russia have a similar percentage of GDP dependent on oil but
poverty is far worse in Russia partly due to significantly higher levels of corruption

Question 19

Economics development as a cause of change in absolute poverty

Answer 19

• as an economy develops per capita incomes will rise. This makes it more likely that necessities will be both available and affordable. Jobs will be more plentiful which decreases the chance of unemployment.

Evaluation:
1) depends on how gains from development are distributed.
2) depends if the government uses gains from economic development to create a social safety net, high -quality public services, and a set of supply-side policies that will foster long-term economic
growth.

Question 20

How does governemtn policy on taxes or benefits change relative poverty

Answer 20

the generosity of the welfare state
influences income levels. For example, reductions in disability or single parent benefits can push household income down to a level below or close to 60% of median income.

Question 21

Education and skills as a reason for poverty

Answer 21

• determinant of lifetime income is the quality of education one has acquired.
• This develops human capital and provides the accreditation required to obtain
  high-paying jobs. One’s starting point plays a big role in determining the quality of education one receives – both between nations and within nations.
• For example, in 2015 one in three
  poorer students achieved the government’s GCSE pass targets compared with more than 60% of their better off peers. In the United States, for instance, out of a hundred children whose parents are among the bottom 10% of income earners, only twenty to thirty go to college.However, that figure reaches ninety when parents are within the top 10% earners. Education can therefore act to entrench poverty and inequality

Question 22

Primary product dependency as a cause for change in absolute poverty

Answer 22

Therefore, primary
product dependency countries will be able to import less and less for a given level of exports (we will look at the reason for this and evaluation points in a later unit). Therefore, living standards in these countries tends to decline over time and is subject to volatility in commodity markets. This results in weak economic growth.

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