0455 · 5.2Poverty

Absolute and relative poverty

0:00A household may struggle to buy enough food, while another can afford meals but cannot enjoy the living standards common around it. Both situations can involve poverty, although they describe different problems. Understanding that difference helps us identify who needs support and why. In this video, we will connect the definitions of poverty to its causes and the policies governments can use to reduce it. Income is money received over a period, such as earnings from employment or payments from the government.

0:26What households can afford also depends on prices and how many people share that money. A family with several children must spread its resources across more needs. Keep those connections in mind whenever you judge whether a household can afford an acceptable standard of living. Absolute poverty occurs when income is too low to afford basic necessities such as food, clean water, shelter and clothing. The central issue is whether people can meet essential needs.

0:50A household unable to afford sufficient food provides a clear example. We judge its circumstances against a basic minimum, even if everyone living nearby faces similar difficulties. The World Bank uses an international poverty line expressed in dollars per person per day to help compare extreme poverty across countries. Its comparisons allow for differences in what money can buy in each country. People living on less than that daily amount are counted as being in extreme poverty.

1:15The line is revised from time to time, but the idea behind it stays the same: an inability to afford basic necessities. A household is in relative poverty when its income is well below the average in that country. People in this position cannot enjoy the living standards most others there have. For example, a household might afford food and shelter but struggle to pay for transport or internet access needed for everyday participation.

1:39The comparison is with the surrounding society, whose usual living standards can change.

Worked poverty comparison

1:44One possible measure sets the relative poverty line at sixty per cent of median income. The median is the middle value when incomes are arranged in order. This gives a reference point for comparing a household with others in the country. Different measurements may use different thresholds, so a question should tell you which one to apply. The difference between absolute poverty and relative poverty is the standard used for comparison.

2:06Absolute poverty focuses on essential needs, while the relative measure considers income compared with others. A household can experience both at the same time. It can also afford basic necessities while remaining far below the living standards usual in its country. Consider a made-up example where comparable monthly household incomes have a median of five hundred dollars. The relative poverty threshold is sixty per cent of that amount. One household receives two hundred and sixty dollars each month.

2:32Assume its basic necessities cost two hundred and twenty dollars, and that its income is fully available to meet those expenses. The relative poverty threshold equals sixty per cent of median income. Sixty per cent of five hundred dollars gives a threshold of three hundred dollars per month. The household receives two hundred and sixty dollars per month, so it falls below that threshold. Its income covers the stated basic necessities of two hundred and twenty dollars per month, so it avoids absolute poverty under these assumptions.

2:58Three hundred minus two hundred and sixty gives a shortfall of forty dollars per month below the relative threshold. This example shows why the definition matters before we choose a policy. Helping the household cover essential costs addresses absolute poverty. To assess relative poverty, we must also consider how its income compares with the wider population. If every household’s income rises by the same percentage, that comparison stays the same, even as more people become able to afford basic necessities.

Causes of poverty

3:26Unemployment exists when people who are willing and able to work cannot find a job. Losing employment removes a source of earnings, so a household may struggle to pay for essentials. Savings can provide temporary protection, but that protection ends when the money runs out. The risk is especially high when the household relied on one worker’s income. Employment offers greater protection when wages are sufficient to cover household needs.

3:49Low wages can leave someone in poverty even while working regularly. A cleaner supporting several dependants may have too little left after paying for accommodation and food. Limited skills or few alternative employers can restrict access to better-paid jobs. Illness can reduce a person’s ability to work, while disability may create barriers to suitable employment. At the same time, treatment, transport and care can raise household expenses. Another family member may reduce working hours to provide support.

4:16Income then falls just as essential spending increases, which makes poverty more likely. Age affects access to earnings and the support people need. Children usually depend on adults, so their circumstances reflect the resources available within the household. Older people may have retired or become unable to work, and some have inadequate pensions or savings. Both the young and the old face greater risks when family assistance and government support are limited.

4:40Environmental factors can destroy livelihoods and raise living costs. Drought reduces crop yields, so farmers have less to sell and must sometimes buy food at higher prices. Floods damage homes, roads and equipment, which households must then pay to repair. Poor land yields little even after hard work, and climate change can make droughts and floods more frequent in some regions. These causes can reinforce one another over time. A household with little income may struggle to afford treatment, so illness continues and restricts employment.

5:09Children may have difficulty attending school regularly because their families cannot meet associated costs. Those disadvantages can limit future earnings, which helps explain why poverty may persist across generations.

Policies to reduce poverty

5:21Policies to alleviate poverty reduce hardship directly, while policies to redistribute income move some income from richer households to poorer ones. Governments can improve opportunities to earn, provide essential services, or increase the money available to poorer households. The most useful approach matches the policy to the cause. A higher national minimum wage, for example, directly helps low-paid employees, while an older person without earnings needs a different form of support.

5:47Gross Domestic Product, or G D P, is the total value of goods and services produced within a country over a period. Real G D P adjusts that value for price changes. Economic growth is an increase in real G D P. Promoting economic growth can help alleviate poverty when expanding production creates jobs and raises the earnings of poorer households. Growth can also increase tax revenue, which gives governments more resources for services and financial support.

6:12However, its benefits may be concentrated among owners or highly skilled workers, so poorer households gain little. Environmentally damaging expansion can also threaten the livelihoods of vulnerable communities. Growth reduces poverty more effectively when opportunities reach low-income households and natural resources remain productive. Improved education develops knowledge and skills that can help people obtain better-paid employment. For example, practical training can prepare an unemployed worker for vacancies that require particular abilities.

6:41Higher earnings then improve the household’s ability to afford necessities. The gains take years to arrive, and training achieves little when suitable jobs are unavailable. When healthcare provision improves, more people can get treatment for illnesses that would otherwise stop them working. Affordable care also leaves households with more money for other essentials. A clinic offering effective treatment can therefore protect both health and earning capacity. However, hospitals, equipment and trained staff are costly, so expanding provision places demands on limited government funds.

7:11The quickest support gives poor households money directly. State benefits are government payments to eligible people, such as unemployed workers, families or pensioners. Making them more generous raises recipients’ income at once, which especially helps households whose members cannot currently work. The extra cost falls on the government budget, and some benefit designs weaken the financial incentive to enter employment. Progressive taxation takes a larger percentage of income as earnings rise.

7:36When higher earners contribute a greater share, the gap between incomes after tax can narrow. The revenue can also finance benefits and services for poorer households, which strengthens redistribution. Set too high, though, the top rates may discourage additional work or encourage tax avoidance, which reduces the revenue collected. For workers on low wages, governments can set a national minimum wage. This is the lowest hourly pay that employers are legally allowed to give eligible workers.

8:01Raising it increases earnings for covered employees previously paid below the new level, provided their hours are maintained. Those households can then afford more necessities. Employers face higher labour costs, however, and some may reduce hiring or working hours, which weakens the effect of the policy on poverty. The policies work through different channels, so combining them can address several causes at once. Education helps people qualify for jobs, while healthcare protects their ability to work.

8:27Benefits support those with insufficient earnings, and progressive taxation helps finance that support. Effective enforcement also matters, because a legal wage floor provides protection only when employers follow it.

Exam technique and recap

8:38Examiners reward answers that keep the comparison standard clear. Evidence about affording basic necessities supports a judgement about absolute poverty, and income measured against the national average identifies relative poverty. Describe progressive taxation by the percentage of income paid, which rises as income rises. For each policy, trace who receives the help, how their income or costs change, and what might limit the improvement. In Paper One Multiple Choice, find the defining feature before choosing an answer.

9:06Basic necessities signal absolute poverty, while income well below the national average indicates relative poverty. In Paper Two structured questions, define asks for a precise meaning, while state requires a point expressed in clear terms. An explain response sets out why or how an outcome occurs. Analyse requires you to examine relationships in detail, so connect the cause, the changes it produces and the effect on poverty. Consider the question, explain how improved healthcare provision can reduce poverty.

9:34Improved healthcare provision gives people better access to effective treatment. Recovery can enable previously ill workers to return to employment. Their earnings increase, so their households can afford basic necessities and poverty falls. Discuss requires a structured examination of the issue in depth, including both sides. Consider whether raising the national minimum wage will reduce poverty. Workers who keep their jobs and hours receive higher earnings, which improves their ability to afford essentials.

9:58However, employers may reduce employment when labour costs rise, so some households lose earnings and face greater hardship. On balance, a moderate, enforced rise in the national minimum wage usually reduces poverty, because higher hourly pay outweighs small job losses. A very large rise could cost so many jobs that poverty increases instead. Households without a working member gain nothing directly, so benefits and employment opportunities remain important for them.

10:23Support each side with a clear economic reason before reaching your conclusion. Absolute poverty means income too low for basic necessities, while relative poverty means income well below the average in a country. Unemployment, low wages, illness, age and environmental factors can all create or deepen hardship. Governments can improve earning opportunities, provide services, support incomes and redistribute resources. Understanding how each measure reaches particular households lets you explain both its potential benefits and its limitations.