poverty and inequality 4.2

Question 1

Absolute (extreme) poverty:

Answer 1

o When a household does not have sufficient income to sustain even a basic acceptable standard of living /to meet people’s basic needs
o Absolute poverty thresholds will vary between developed and developing countries o The World Bank now has two “extreme poverty lines”:
 (1) Percentage of population living below $1.90 a day (PPP)
 (2) Percentage of population living below $3.10 a day (PPP)

Question 2

Relative poverty

Answer 2

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

Question 3

Main causes of absolute (extreme) poverty part 1

Answer 3

1. Population growing faster than GDP in low income countries leading to lower per capita incomes.
2. A severe household savings gap – with many families unable to save and living on less than $1.90 per day.
3. Absence of basic government / public services such as education and universal health care.
4. Effects of endemic corruption in government and business.

Question 4

Main causes of absolute (extreme) poverty part 2

Answer 4

5. High levels of debt and having to pay high interest rates on loans.
6. Damaging effects of civil wars and natural disasters leading to huge displacements of population.
7. Low rates of formal employment, many people in vulnerable/insecure jobs and earning poverty wages.
8. Absence of basic property rights which for example constrains ability to own land, claim welfare.

Question 5

Relative Poverty occurs

Answer 5

because income and consumption are skewed across households, communities and regions.

Question 6

Main causes of relative poverty include:

Answer 6

• Cuts in top rate income taxes in many countries increasing disposable incomes of richer households.
• 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 to 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.

Question 7

Multi-Dimensional Poverty Index (MPI)

Answer 7

The UN’s Multi-dimensional poverty index is an attempt to go deeper than the basic Human Development Index to see if progress is being made - against sustainable development standards – to lower the vulnerability of people in emerging and developing countries to severe deprivation.
* The MPI scrutinizes a person’s deprivations across 10 indicators in health, education and standard of living

Question 8

Quintile ratio:

Answer 8

This is the ratio of the average income of the richest 20% of the population to the average income of the poorest 20% of the population.

Question 9

Main causes of inequality within countries

Answer 9

1. Big differences in wages and earnings in different jobs/occupations.
2. Wage differentials are themselves caused by demand and supply-side factors in the labour market: - qualifications, trade union, skills
3. The effects of unemployment especially among the long-term unemployed and younger workers.
4. Damaging effects of poor health and nutrition on employment opportunities and productivity.
5. Changes in the taxation of income and wealth including the extent to which a tax system is progressive on higher incomes and the wealth of the richest in a society.

Question 10

Main causes of inequality between countries:

Answer 10

1. Low life expectancy
2. Low school enrolment rates as families cannot afford education
3. Low access to basic health care and poor nutrition which impairs brain development among the young.
4. Vulnerability to loan sharks for families mired in debt – having to pay very high interest rates.
5. Limited access to affordable technologies – creating a digital divide.
6. Much lower productivity which then leads to lower wages.

Question 11

what are main pillars of a free market, capitalist economic system

Answer 11

capitalist economy leads to income primarily due to wage differentials
- private property
- self interest
- competition in markets
- operation of price mechanism
- freedom of choice
- limited role for government

Question 12

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

Answer 12

• profit motive
• capitalist labour market

Question 13

poverty trap

Answer 13

affects people on low incomes, when tax and welfare system creates a disincentive to look for work or work for longer hours

Question 14

income vs wealth

Answer 14

Income is a flow of earnings, whilst wealth is a stock of asset.

Question 15

define income inequality

Answer 15

refers to the extent to which income is distributed in an uneven manner.

Question 16

measures of income inequality

Answer 16

• lorenz curve, Gini coefficient

Question 17

impact of economic change in development

Answer 17

• The Kuznets hypothesis says that as society develops and moves from agriculture to industry, inequality increases as the wages of industrial workers rises faster than farmers. Then, wealth is redistributed through taxation and government spending and
  so inequality falls.
• BUT, However, Piketty discredited this theory by arguing that inequality rises as the country develops as the rate of return on capital grows, so the rich get richer and inequality increases.