Theme 4.2

Question 1

What is absolutely poverty?

Answer 1

● Absolute poverty is when people are ​unable to afford sufficient necessities to maintain life. The UN defines absolute poverty as ‘a condition characterised by severe deprivation of basic human needs, including food, safe drinking water, sanitation facilities, health, shelter, education and information.
● The World Bank defines anyone living on ​less than US$2.15 ​a day as living in absolute poverty.

Question 2

What is the correlation between economic development and absolute poverty?

Answer 2

● Economic development tends to be correlated with absolute poverty- the more developed a country, the fewer people in absolute poverty. In developed countries, the government tends to intervene to attempt to provide the necessities.

Question 3

What is relative poverty?

Answer 3

It will always exist in a society that is not completely equal. Relative poverty is about ​people’s income compared to others in their area​. Someone is said to be in relative poverty if their income falls below an average income threshold for the economy; they are at the bottom end of the income scale.
● In Britain, relative poverty is classed as those with an ​income of less than 60% of median household income (£27,300 in 2017) after deducting household costs. ​One in 5 people in the UK live below the official poverty line, with 14m people in relative poverty​.

Question 4

What is an alternate definition for relative poverty?

Answer 4

● Another way of defining relative poverty is those who cannot afford to buy goods which they need to buy in order to not be considered poor according to ​social norms​, for example an electric fridge or mobile phone.

Question 5

What is the poverty line?

Answer 5

The ​poverty line is the minimum level of income deemed necessary to achieve an adequate standard of living in a given country. The ​poverty trap affects people on low incomes, when the tax and benefits system creates a disincentive to look for work or work for longer hours. By working longer hours, individuals may find they lose income due to income tax and national insurance contributions as well as losing some income-related state benefits.

Question 6

What three methods can be used to reduce relative poverty is a country?

Answer 6

-Providing free childcare (allows parents to work)
-Reversing the cuts on tax credits and universal credits.
-Reducing the private rental housing costs

Could increase the minimum wage, but this is unlikely to be as effective.

Question 7

What are the causes of poverty changes?

Answer 7

-Economic Growth: Increases in a country’s overall income and GDP can reduce absolute poverty by providing more resources to meet basic needs.
-Income Inequality: Rising income inequality can lead to an increase in relative poverty, even in economically prosperous societies.
-Population Growth: Rapid population growth can strain resources and lead to an increase in absolute poverty.
-Age and Gender: Vulnerable groups such as children and women are often more prone to poverty due to factors like limited access to education and employment opportunities. Rising life expectancies puts financial strain on pension budgets.
-Social Safety Nets: Effective social welfare programs can reduce both absolute and relative poverty by providing support to those in need.
-Taxation and Redistribution: Progressive tax systems and income redistribution policies can help mitigate income inequality and reduce relative poverty.
-Globalisation: Economic globalization can impact poverty levels through changes in trade, investment, and labor markets.
-Foreign Aid: International aid and development programs can contribute to poverty reduction in developing countries.

Question 8

Why has relative poverty grown in the UK?

Answer 8

-There has been growing ​inequality in wages growth​, with the highest paid jobs seeing their wages increase higher than those on lower wages. Those in the public sector have had low wage increases and several years of falling real wages, due to the policy of austerity. ​The wages of the richest are now 170 times the average worker, ​compared to 60 times before.
-De-industrialisation has increased the number of service sector jobs which tend to be lower paid.
-Globalisation pressuring firms to reduce costs
-There has been a growth in ​underemployment, zero-hour contracts,
part-time jobs and temporary jobs, all of which mean lower wages for workers.
-The decline of ​trade unions has left many workers unable to bargain for higher wages.
-state benefits have fallen in relative value whilst taxes have become more ​regressive​.
-Moreover, ​long term and structural unemployment​ has risen.
-House prices/renting prices growing at a faster rate than average incomes.
-People living longer increases the dependency ratio, and causes the amount of elderly living in relative poverty to increase.

Question 9

What is the impact of poverty on the UK gov spending? (2016)

Answer 9

-Overall, £78billion was spent by the UK gov due to poverty. This was mainly due to:
-£29bn on treating health conditions associated with poverty
- £10bn on schools providing initiatives such as free school meals and pupil premium for poorer students
-£9bn on the police and criminal justice systems dealing with the higher incidence of crime in more deprived areas

Question 10

What % of people in some nations live below the absolute poverty level?

Answer 10

-33% of India’s population
-13% of China’s population

Question 11

What are the causes of absolute poverty?

Answer 11

•Population growing faster than GDP in low income countries
-Unable to save
•Absence of basic government/public services
•Effects of endemic corruption in government and business
• High levels of debt and high interest rates
• Damaging effects of civil wars and natural disasters
•Low employment rates, vulnerable jobs and poverty wages

Question 12

What are the main causes of relative poverty?

Answer 12

-Inequalities in wages and earning growth
-Unemployment, as government benefits are significantly lower than wages
-The falling relative value of sate benefits
-Regressive taxes
-Low levels of skills or education

Question 13

What is the difference between income and wealth?

Answer 13

Income is a ​flow ​of earnings, whilst wealth is a ​stock of asset. Income inequality refers to the extent to which income is distributed in an uneven manner.

Question 14

Is wealth or income more likely to become unequally distributed?

Answer 14

● Wealth is likely to be more unequally distributed than income because assets that make up wealth can be accumulated over time. People who are wealthy now can generate an income from those assets and as long as income exceeds expenditure, they are able to build up a stock of assets. This accumulation of wealth can occur over successive generations through inheritance.

Question 15

What is the Lorenz curve?

Answer 15

​This shows the cumulative percentage of the population plotted against the cumulative percentage of income that those people have. A perfectly equal society would have a straight line from corner to corner; the degree of the bend away from that straight line indicates the degree of inequality.

Question 16

What is the equation for the gini coefficient and what is it?

Answer 16

​A/(A+B)- the ratio of the area between the 45-degree line and the Lorenz curve divided by the whole triangle under the 45-degree curve. It is measured between 1 and 0 and the bigger the coefficient, the more unequal the country.

Question 17

What factors cause income and wealth inequality within countries?

Answer 17

-Wages
-Wealth/asset ownership Levels (also impacts by inheritance)
-Chance
-Age
-Changes to taxation
-Trade unions

Question 18

What factors cause income inequality to rise between countries?

Answer 18

-Globalisation
-Technological progress
-Offshoring
- International wage competition
-Economic change
-Access to natural resources

Question 19

What factors could cause income inequality both between and within a country?

Answer 19

-Education
-Skills and training
-Type of employment
-Deregulation

Question 20

How do wages cause income inequality within countries?

Answer 20

Some workers simply earn more than others. This can be because of higher educational achievements, because they work longer hours or because their skills are more in demand. Those who aren’t in work will have a lower income than others e.g. pensioners or those on benefits. Moreover, the higher the level of income, the more someone can save and thus the more wealth they can build up. Those on high incomes will be able to build up a stock of assets whilst those on lower incomes may have to spend most of their money on everyday items like food.

Question 21

How do wealth levels cause economic inequality within countries?

Answer 21

Someone who already has a high level of wealth, whether through inheritance or saving, is able to build up larger wealth than those on lower levels of wealth. For example, they may undertake more risky investment which will give a higher rate of return. They could buy property in London which they hope will rise in price and make a huge return. Those with lower levels of wealth are unable to do so. Inheritance often allows high levels of wealth. Moreover, high levels of wealth mean people can earn rent and interest on their assets and so therefore see increased income.

Question 22

How can chance and age cause income/wealth inequality between countries?

Answer 22

● Chance: Those who bought houses in the right area or bought the right assets will see a huge increase in the price of their assets and hence an increase in their wealth. They may have been lucky to inherit wealth. Those who chose the right sort of job will have seen their income rise higher than other areas.
● Age: Working adults at the peak of their career will earn a higher income than those who have just started. Those who are older will have had a chance to build up more assets, although some of this stock may have been used up to pay for retirement.

Question 23

Why do we see income inequality between nations?

Answer 23

Some countries have been held back by wars, droughts, famines and earthquakes. Certain social groups may have been excluded and marginalised. Developed countries tend to favour each other when trading, negotiating etc. and this helps them to develop more than countries who are not involved in the agreements.

Question 24

What was the Kuznet’s curve hypothesis?

Answer 24

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.

This can be shown with the Gini coefficient on the y-axis, and development on the x-axis.

Question 25

How do Piketty disregard Kuznet’s theory?

Answer 25

● 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.

Question 26

What are some examples of gini coefficients?

Answer 26

UK: 0.347
South Africa: 0.630
Norway: 0.227

Question 27

How are incomes usually compared between countries?

Answer 27

Using GNI per capita.
However, this does have its limitations, such as much of the economic activity which takes place informally within a developing country may not necessarily be captured by a strictly monetary measure such as GNI per capita.

Question 28

What are some examples of measurement issues when measuring inequality?

Answer 28

-Household income may not be the most appropriate measures. An income for a household could be sustainable if that household only has two people living in it, but less suitable for a 4 person household. A household salary for a family of 4 (2 adults two kids) of £40,000 is equivalent to a household income of £33,900 if it is just two adults in the household.
-Many services (e.g education and health) can be provided by the government, which will benefit both the rich and the poor.
-Wealth distribution will be more unequal than income distribution
-There is also an argument housing costs should be subtracted from salaries before comparisons are made, as this is a fixed, sunk variable in the short run.

Question 29

What are some examples of income?

Answer 29

-Wages and salaries
-Benefits (pension, tax credits)
-Profit
-Dividends
-Rental income
-Interest payments

Question 30

What are some examples of wealth?

Answer 30

-Savings
-Ownership of shares
-Ownership of property
-Corporate bonds/government bonds
-Wealth tied up in pensions/life assurance

Question 31

Why may some people argue that income and wealth inequality is justifiable?

Answer 31

-Incentives play an important role in a free market.
-People need incentives to take risks. Without the prospect of higher income, enterprise would be limited. Therefore, a degree of inequality is needed in a free market economy.
-Greater rewards for hard work and the possession of qualifications and scarce skills
-Policies to reduce inequality may create disincentives to work
-e.g. higher income tax may discourage working overtime. Benefits to the unemployed / low paid can discourage taking work (unemployment trap / poverty trap).

Question 32

What is the significance of capitalism on inequality?

Answer 32

● A capitalist economy leads to income inequality because of ​wage differentials​. Wages vary as they are based on demand and supply, and demand and supply vary for different jobs.
● Individuals also ​own resources and thus wealth differs based on the assets they own. Wealth can be passed on or gained through saving of incomes.
● It is argued that equality can never be achieved in a capitalist society where the possibility of having more is important to encourage hard work. Without the incentive to gain more, people will not try hard or take risks since they have no reason to and this means the economy won’t grow; ​inequality is essential for capitalism to work​.
● A degree of inequality is necessary and desirable, but ​excessive inequality causes problems​ with efficiency and social justice.

Question 33

What is levelling up?

Answer 33

This is when a government focuses on allowing poorer parts of country to catch up with the wealthier areas, and reduce inequality within a nation. This could be done through investment into education, services, or infrastructure. Strategies can also be used to attract wealthy people (gentrification) or large businesses to an area, for example through enterprise zones and tax reductions.