Poverty And Inequality

Question 1

What is absolute poverty

Answer 1

According to the world bank, people are considered to be living in absolute poverty if their incomes fall below the minimum level to meet basic needs such as food, shelter, clothing, access to clean water, sanitation facilities, education and information. This minimum level is usually called the poverty line.

Question 2

What was one of the key millennium development goals to do with absolute poverty

Answer 2

Aimed to halve the number of people living in absolute poverty by 2015. This target of reducing extreme poverty rates by half was met by 2010, when 700 million fewer people than in 1990 were living in conditions of extreme poverty. However, in 2015, 1.2 billion people were still living in extreme poverty. These millennium development goals were succeeded by the sustainable development goals in 2015, the first of which is to ‘end poverty in all its forms everywhere’

Question 3

When are people considered to be in relative poverty

Answer 3

People are considered to be in relative poverty if they are living below a certain income threshold in a particular country: for example, below 60% of the median income. Therefore, the concept of relative poverty is:

Subjective

Subject to change over time

Not comparable between countries (ie someone deemed relatively poor in the USA would be regarded as being incredibly rich in Malawi)

Relative poverty arises from inequality

Question 4

How can we take measures of absolute poverty

Answer 4

Absolute poverty is based on a set standard that is constant over time and between countries, referring to the ability of individuals or groups to meet their basic needs.

In 2015, the world bank set the international absolute poverty line at $1.90 a day at 2005 GDP measured at purchasing power parity, i.e adjusted for international purchasing power.

Question 5

How can we measure relative poverty

Answer 5

Relative poverty is measured in comparison with other people in that country. Therefore, there will always be some people who are relatively poor in any given country. Relative poverty lines are defined in relation to the overall distribution of income or consumption in a country, so if a person is living below a certain income threshold in a particular country, they would be classified as being in relative poverty. For example, in the EU, people whose income is less than 60% of median income are considered to be ‘at risk of poverty’ and are said to be relatively poor.

Question 6

Changes in the following factors may result in changes in absolute and relative poverty, what are the factors

Answer 6

Aid

Debt relief

Fair trade schemes

Micro finance schemes

Employment opportunities

Education and training

Wage rates and national minimum wage

Property rights

Ownership of assets and their prices, eg houses and shares

Social benefits (transfer payments)

Question 7

What’s the distinction between wealth and income inequality

Answer 7

Wealth is a stock concept. Wealth inequality refers to inequality based on value of tangible assets, eg property, shares, works of art.

Income, on the other hand, is a flow concept. Income inequality refers to inequality based on incomes from wages, rent and profit.

Question 8

What does the Lorenz curve measure

Answer 8

The degree of inequality

It’s a measurement of inequality

Question 9

What is the Lorenz curve

Answer 9

The degree of inequality can be measured using a Lorenz curve, which plots the cumulative percentage of the population against the cumulative percentage of total income. The 45 degree line(starting from the origin and moving to the top right) represents perfect equality, such that the poorest 10% of the population would receive 10% of the income and so on. The curved line (usually under the perfect equality line) represents an unequal distribution of income.

The area between the straight line and curve and area below a country’s curve are used in the calculation of the Gini coefficient.

The curve line starts flat and gets steeper for a country’s inequality.

Question 10

What does the straight 45 degree line represent on the Lorenz curve

Answer 10

Perfect equality such that the poorest 10% of the population would receive 10% of the income.

Question 11

What is the Gini coefficient

Answer 11

This is a measure of the degree of inequality in a country

Question 12

How is the Gini coefficient calculated

Answer 12

G = A/(A+B)

Where areas A and B are from the Lorenz curve diagram
Area A is the area between the 45 degree line and the Lorenz curve
Area B is the area below the Lorenz curve (a country’s inequality curve).

Question 13

What does the result of the Gini coefficient mean

Answer 13

Where A represents the area between the diagonal line and the Lorenz curve and B represents the area under the Lorenz curve.

The Gini coefficient will have a value of between 0 and 1, with 0 representing absolute equality (the Lorenz curve and line of total equality are merged) and 1 absolute inequality (the Lorenz curve would lie along the horizontal and vertical axes).

Question 14

The Gini coefficient may also be expressed as a percentage, how would we calculate this

Answer 14

G = A/(A+B) x 100

Question 15

List me the factors that may cause income and wealth inequality

Answer 15

Education and training

Wage rates

Unemployment

Social benefits (transfer payments)

Progressive and regressive taxes

Inheritance

Ownership of assets and their prices, eg houses and shares

Pensions (state and private)

Question 16

Why is inequality often regarded as an inevitable cost with economic growth

Answer 16

Inequality is often regarded as an inevitable cost associated with economic growth because owners of resources and the means of production will become wealthier relative to workers.

Question 17

it may be argued that inequality itself is a constraint on economic change and development for the following reasons:

Answer 17

The very poor will have no collateral and so will be unable to start their own businesses

Absolute poverty could remain high in countries where inequality is high

Those on low incomes will have a low marginal propensity to save, so limiting funds available for investment, while those on high incomes may spend a large amount of their incomes on imported goods or may transfer their incomes to other countries (known as capital flight) ✈️

Further, there may be socially undesirable consequences of inequality, such as an increase in the crime rate, which might have an adverse effect on growth and development.

Question 18

Tell me about the significance of capitalism for inequality

Answer 18

Inequality is identified as a consequence of a free market economy/ capitalist economy. The reason relates back to two key features of the free market economy:

Private ownership of resources

The profit motive

It is inevitable that private ownership of resources will enable those who accumulate more assets to be richer relative to those who own few resources. The profit motive is necessary in a capitalist, free market economy to encourage entrepreneurs to take risks involved in production. Such entrepreneurs are likely to become much richer than workers if their businesses prove to be successful.

Question 19

What does absolute property refer to

Answer 19

People who have insufficient resources to meet their basic needs

Question 20

What does relative poverty refer to

Answer 20

Those living below a certain income level

Question 21

What factors may caused wealth and income inequality

Answer 21

Inheritance, ownership of assets, education, wage rates, age, pension entitlements, unemployment, taxes, and social benefits

Question 22

How may inequality be measured

Answer 22

By reference to the Lorenz curve and Gini coefficient

Question 23

What could inequality limit

Answer 23

Growth and development, eg because those in absolute poverty will be unable to obtain loans to start a business

Question 24

Will a fall in absolute poverty necessarily cause a fall in relative poverty

Answer 24

No: a fall in absolute poverty may be caused by rising real incomes but relative poverty could actually increase because the latter measures the proportion of people below a set level, eg 60% of the median income.

Question 25

What would happen to the Lorenz curve if inequality within a country increased

Answer 25

The Lorenz curve would move further away from the 45 degree line