Poverty & Inequality

Question 1

What is the difference between absolute and relative poverty?

Answer 1

• Absolute poverty: When an individual cannot afford basic human needs like food, water, and shelter.
• Relative poverty: When an individual’s income is significantly lower than the average in their society.

Question 2

What are the 4 main causes of poverty?

Answer 2

• Low income – Insufficient earnings to meet basic needs.
• Unemployment – Lack of job opportunities or skills mismatch.
• Hysteresis effect – Long-term unemployment reduces skills, making reemployment harder.
• Rising wages vs benefits – If wages grow faster than state benefits, those on welfare struggle more.

Question 3

What is the poverty trap?

Answer 3

The poverty trap occurs when working provides no net financial gain due to loss of benefits.

Question 4

What are the 5 effects of poverty? (2 pros & 3 cons)

Answer 4

✅ Possible benefits:
• Encourages people to work harder to escape poverty (incentive effect).
• Wealth trickle-down may create jobs.

❌ Negative effects:
• Higher crime rates – Poverty can lead to theft, fraud, and other crimes.
• Wasted human capital – Talented individuals may lack resources to pursue opportunities.
• Lower productivity – Poor health, education, and nutrition affect work performance.

Question 5

How can governments reduce poverty? (5 things)

Answer 5

1. Progressive taxation – Higher earners pay more tax, reducing income inequality.
2. Economic growth stimulation – Creates jobs and raises wages.
3. Minimum wage laws – Ensures workers earn enough for basic needs.
4. State benefits – Provides financial support to the unemployed and disabled.
5. State provision – Free schooling and healthcare improve long-term opportunities.

Question 6

What is income inequality vs wealth inequality?

Answer 6

• Income inequality: Differences in how much people earn (e.g. wages, salaries).
• Wealth inequality: Differences in accumulated assets (e.g. property, investments).

Question 7

What are the 5 main causes of inequality?

Answer 7

• Regressive taxation – Poorer individuals pay a higher proportion of income in tax.
• Skill differences – Higher-skilled workers earn more.
• Discrimination – Wage gaps based on gender, race, or background.
• Regional disparities – Some areas have better job opportunities than others.
• Inheritance – Wealth passes through generations, reinforcing inequality.

Question 8

What is the Lorenz Curve, and how does it show inequality? (Mention 3 things too)

Answer 8

• The Lorenz Curve shows the cumulative percentage of total income held by different parts of the population.
• A more unequal society has a curve further from the 45-degree line.
• The Gini coefficient measures inequality:
• 0 = perfect equality (everyone has the same income).
• 1 = total inequality (one person has all the income).

Question 9

What are the 3 benefits and 3 costs of income inequality?

Answer 9

✅ Benefits:
• Encourages hard work – People strive for higher incomes.
• Promotes investment – Wealthy individuals fund businesses.
• Trickle-down effect – Economic success at the top may create jobs.

❌ Costs:
• Higher absolute and relative poverty – Poor struggle to afford essentials.
• Increased crime – Desperation may lead to theft or fraud.
• Worsening balance of trade – Richer individuals may spend more on imports.

Question 10

How does globalisation affect inequality? (3 things)

Answer 10

• Developed countries: Deindustrialisation has reduced wages for low-skilled workers.
• Developing countries: Higher GDP per capita (e.g. China), but job creation hasn’t matched job losses.
• Job outsourcing: Some Western jobs moved to developing nations, benefiting businesses but increasing wage gaps.

Question 11

Why might government policies to reduce inequality fail? (4 things)

Answer 11

1. Progressive taxation – May discourage work if high earners feel overtaxed.
2. Minimum wage laws – Could increase unemployment if firms can’t afford higher wages.
3. Means-tested benefits – Can discourage work if benefit reductions offset wage gains.
4. Regional disparities – National policies may not address local inequalities.

Question 12

What are the 6 economic consequences of reducing poverty? (3 + & 3 -)

Answer 12

✅ Positive effects:
• Higher economic growth (more spending, higher productivity).
• Better health and education outcomes.
• Increased social mobility.

❌ Negative effects:
• Higher government spending (on welfare, education, healthcare).
• Potential work disincentives (people may rely on benefits).
• Higher taxes to fund redistribution policies.