Poverty & Inequality

Question 1

What is absolute poverty?

Answer 1

When a person is living on less than $1.25 a day where their income falls below minimum level (poverty line) to meet basic needs such as food, shelter, clothing, access to clean water, education etc.

Question 2

What does the poverty line provide?

Answer 2

An objective measure, based on value judgements likely to vary over time & between societies

Question 3

What is relative poverty?

Answer 3

When a person is living below a certain income threshold in a particular country

Question 4

What are the issues with the concept of relative poverty?

Answer 4

Measured by calc. % of population living below 50% of median income

• highly subjective
• change over time
• not comparable between countries (e.g poor in US, rich in Malawi)

Question 5

Poverty is a multidimensional concept so what factors may be used in assessing poverty?

Answer 5

Level of indebtedness
Level of unemployment
Extent of poor health/ educational disadvantage
Number of people living in inadequate housing/ poor environmental conditions
Extent to which people have inadequate access to public services
Proportion of households having access to given basket of goods/services

Question 6

What is the Human Poverty Index (HPI)?

Answer 6

There are 2 indices:
HPI-1
- measure of deprivation in the poorest countries of the world
HPI-2
- measure more relevant to developed countries

Question 7

What are the 3 elements of HPI-1?

Answer 7

1) % of people not expected to reach 40yrs
2) % of population who are illiterate
3) % of children who illiterate & % of population who don’t have access to safe water & healthcare

Question 8

What are the 4 elements of HPI-2?

Answer 8

1) Probability at birth of not surviving to age 60 (x100)
2) Adults lacking functional literacy skills
3) Population below income poverty line (50% of median adjusted household disposable income)
4) Rate of LT unemployment (>12months)

Question 9

What are the causes of poverty?

Answer 9

1) Unemployment
- no job = no income (Egypt)
2) Lack of human capital (education & training)
- little human capital, workers only sell their services in market for low wages
3) Lack of financial capital - particularly hits those who are retired
- inadequate savings to give pension or other income
4) Health problems
- affect ability to work & earn £
5) Dependency
e. g % children in poverty > % adults of working age, also those dependent on unemployment benefits tend to be poor
6) Cycle of poverty
e. g someone born in Tanzania likely to remain poor for rest of lives compared to born into a poor family in the UK
- less education/ health care etc.
7) Amount of physical & intellectual capital
e. g patents important determinant of poverty
- more likely to live off <$100 a year if live in country with few roads, hospitals, airports, research facilities etc.

Question 10

What are the consequences of poverty?

Answer 10

Absolute poverty:
- lack of necessities of life lead to ill health & possibly death
- no collateral so unable to secure loan to start their own businesses
- MPS low therefore limit funds available for I
Relative poverty:
- ill health & death still hazard
- lower life expectancy
- lack of access to health care (USA)
- psychological well being (low self-esteem, less control on their lives)
- affect quality of life & mental well being

Question 11

What is inequality?

Answer 11

The unequal distribution of household/ individual income across various participants in an economy

Question 12

What are the causes of income inequality?

Answer 12

1) Earned income
- some workers earn more than others
2) Unemployment & retirement
- not all people work, non-workers receive less
e. g increase in no. pensioners in UK leads to increase in poverty
3) Training skills/ education
- more educated tends to be the more you earn etc.
4) Household composition
- one person may earn high salary but if he/she has a large family income per person in household quite low on other hand, 2 parent wage earners 4 child wage earners high income despite all low paid
- inequalities differ according to whether measured per individual or per household
5) Government policy
- extent to which gov redistributes income through taxes & benefits affect distribution of income
e. g more progressive tax system then income inequality may be reduced
6) Degree of competition in product markets
- imperfectly competitive markets different distribution of income & wealth than competitively

Question 13

What is income?

Answer 13

Flow concept

e.g money earned by person over period of time

Question 14

What is wealth?

Answer 14

Refers to stock of assets a person owns

Question 15

What causes wealth inequality?

Answer 15

1) Ownership of assets
e. g houses & shares
2) Inheritance
- how much individual/household inherits from relatives have significant effect on distribution of wealth

Question 16

What other causes of inequality are there within a country?

Answer 16

1) Economic development
- if economy at early stage of development & primary agricultural then relatively low level of income inequality
- industrialisation results in increased inequalities but some point starts to decrease (gov have more resources to redistribute income?)
2) Trade
- some argue trade has increased inequality
- large TNCs exert their monopsony power by driving down prices prepared to pay for commodities from producers in developing/ emerging economies

Question 17

Evaluate how globalisation has helped to reduce inequality between countries.

Answer 17

Industrialisation in China resulting in halving of people living in absolute poverty
However, evidence that globalisation has increased inequality within countries
- unskilled workers in developed economies faced decline in heir real wages/ made redundant as wages in developing countries often significantly lower
- market for highly skilled & talented workers now global so workers able to command v.high salaries
- significant increase in no. large TNCs & those at top of these companies often paid v.high salaries

Question 18

What are the consequences of inequality?

Answer 18

1) Country where great inequality:
- could be significant no. people in absolute poverty
- rich have a high MPC on M goods or may transfer large MPC abroad (capital flight)
- poor have a low MPS limiting funds available for I
2) Result in loss of social cohesion having adverse consequences for growth
e. g crime rate might increase & strikes might become more frequent

Question 19

What measures can the government use to reduce inequality?

Answer 19

1) Improved quality of education & training for poor
- gov’s might improve access for those from disadvantaged backgrounds e.g higher student loan
2) Tax system more progressive
e. g increasing no. tax bands on incomes
3) Higher inheritance tax
- would have significant impact on distribution of wealth
4) Increasing no. & range of means-tested benefits
- transfer payments targeted to those in greatest need
5) Measures to increase geographical mobility of labour
- workers who are unemployed in 1 region can transfer to another with available employment
6) Introduction/ increase in NMW
- help prevent workers being exploited