Theme 4: A Global Perspective — Section 4.2: Poverty and Inequality
Topic 4.2.1: Absolute and Relative Poverty
Welcome to your study guide for Absolute and Relative Poverty! Whether you are aiming for an \(A^*\) or just trying to get your head around the core concepts, this guide breaks down everything you need to know for your Pearson Edexcel A Level Economics A (9EC0) exams. Don't worry if this topic feels broad at first—once you understand the fundamental difference between surviving and participating in society, the rest falls into place naturally.
---1. Understanding the Core Distinction: Absolute vs. Relative Poverty
Before diving into numbers and policies, let's establish what poverty actually means. In economics, poverty is an income or consumption flow problem (meaning an individual or household lacks an adequate flow of resources over time), rather than a wealth problem (which refers to a stock of accumulated assets).
A. Absolute Poverty
Absolute poverty is a condition where individuals or households do not have the minimum income or resources necessary to meet basic physical human survival needs. These essential physical needs include:
• Adequate food and clean, safe drinking water
• Basic sanitation facilities and shelter
• Basic healthcare and clothing
Key Feature: Absolute poverty is fixed against a subsistence standard. It does not automatically change when the wider economy grows wealthier. If a person cannot afford enough calories or clean water to stay alive, they are living in absolute poverty, regardless of where they live or what era they live in.
B. Relative Poverty
Relative poverty is a condition where a household's income or consumption is substantially below the prevailing standard of living in that specific society, resulting in social exclusion and an inability to participate fully in normal community life.
• It is a comparative and dynamic standard.
• As the general standard of living and median incomes in a nation rise, the threshold for relative poverty rises automatically.
• For example, not having home internet access or the ability to heat your home during winter in modern Britain might not threaten immediate physical survival, but it prevents full participation in modern society.
Analogy Time: Imagine you are on a deserted island. If you have no fresh water or shelter, you are in absolute poverty. Now imagine you live in a modern city where everyone travels by public transport or car, but your income is so low you cannot afford bus fare or a phone to apply for jobs. You are not starving, but you are excluded from society—that is relative poverty.
Key Takeaway for Section 1: Absolute poverty is about physical survival against a fixed baseline; relative poverty is about social inclusion and comparison against the prevailing living standards of your society.
---2. Measuring Poverty: Official Thresholds and Metrics
Examiners love testing the precise definitions and measurement methods for both types of poverty. Make sure you know these exact standards!
A. Measuring Absolute Poverty: The International Poverty Line (IPL)
The standard global benchmark for absolute poverty is set by the World Bank using the International Poverty Line (IPL).
• Historically, this was set at \(\$1.90\) per day (based on 2011 prices).
• It was updated to \(\$2.15\) per day (based on the 2017 baseline), with recent updates reaching approximately \(\$3.00\) per day.
• Crucial Methodological Requirement: This threshold is calculated using Purchasing Power Parity (PPP) exchange rates, not market exchange rates!
Why is PPP essential? Market exchange rates only reflect traded goods and volatile currency movements. PPP adjusts for the actual local purchasing power and cost of living in each country. A single US dollar can buy far more food and basic goods in rural Kenya or India than it can in London or New York. PPP ensures the measurement reflects the true ability to buy basic survival essentials anywhere in the world.
B. Measuring Relative Poverty: The UK and EU Standard
In the UK and across the European Union, relative poverty is officially measured using a household income benchmark:
• A person is in relative poverty if they live in a household with an equivalised disposable income below \(60\%\) of the national median household income.
• Equivalised simply means the income is adjusted to reflect different household sizes and compositions.
• This measure is assessed in two main ways: Before Housing Costs (BHC) and After Housing Costs (AHC).
Examiner Warning: Median vs. Mean!
Never write "60% of average income" or "60% of the mean income" on your exam. The official measure strictly uses the median (the exact middle value of all household incomes arranged in order). Why? Because the mean is heavily skewed upwards by a tiny number of ultra-wealthy individuals (multi-millionaires and billionaires), which would give an inaccurate picture of typical living standards.
Key Takeaway for Section 2: Absolute poverty is measured globally via the World Bank IPL (\(\$2.15\) per day at PPP). Relative poverty is measured in the UK/EU as living in a household with income below \(60\%\) of the national median disposable income.
---3. Causes of Changes in Absolute and Relative Poverty
Why do poverty levels rise or fall over time? In your essays and data questions, you will need to distinguish between factors driving absolute poverty versus those driving relative poverty.
A. Causes of Changes in Absolute Poverty
1. Economic Growth and Rising Real Incomes: Broad-based Gross Domestic Product (GDP) growth generates employment, boosts business profits, and lifts real wages. When people at the very bottom earn higher real wages, they cross fixed subsistence thresholds. For example, rapid, sustained economic growth in China and East Asia since 1990 lifted hundreds of millions of people out of absolute poverty.
2. Access to Basic Public Services and Infrastructure: When governments or non-governmental organisations (NGOs) invest in clean piped water, sanitation grids, electricity, primary schools, and basic healthcare, the physical capabilities and productivity of individuals rise sharply, directly reducing absolute deprivation.
3. Social Safety Nets and Targeted Transfers: Direct cash transfers or state-provided emergency welfare floors ensure that vulnerable citizens do not fall below the bare minimum required for physical survival.
4. External Shocks (Conflict, Climate Shocks, and Natural Disasters): Wars, droughts, floods, and harvest failures destroy livelihoods and disrupt food supplies, causing sudden spikes in extreme absolute poverty.
B. Causes of Changes in Relative Poverty
Relative poverty changes whenever the income gap between low earners (or benefit recipients) and middle earners (the median) changes.
1. Welfare and State Benefits vs. Wage Growth: If state pensions, universal credit, and unemployment benefits increase at a slower rate than median wage growth (or are frozen while wages rise), those dependent on welfare fall further behind the median. Their relative poverty increases, even if their nominal income stays the same.
2. Changes in Tax Progressivity: If a government shifts its tax burden from direct progressive taxes (such as progressive income tax) toward indirect, regressive taxes (such as Value Added Tax or fuel duties), lower-income households lose a larger percentage of their disposable income relative to higher earners, increasing post-tax relative poverty.
3. Labour Market Factors:
• The Gig Economy and Underemployment: The rise of zero-hour contracts and insecure gig work leaves some workers with low, unpredictable hours while high-skilled professional salaries surge.
• Skill-Biased Technical Change (Automation): Technology and digital tools raise the marginal revenue product (and wages) of highly skilled workers while replacing routine manual or unskilled jobs.
• De-industrialisation and Structural Unemployment: Long-term regional job losses can lead to hysteresis (where workers lose skills and motivation after extended unemployment, permanently lowering their earning potential).
• Minimum Wages and Trade Union Strength: Reductions in union power reduce bargaining power for lower-tier workers, whereas increases in the National Living Wage / Minimum Wage help narrow the gap to the median.
4. The Poverty Trap / Unemployment Trap: When an individual on means-tested welfare finds work or increases their working hours, they face simultaneous tax deductions (income tax and National Insurance) and the withdrawal of welfare benefits. This creates a very high Effective Marginal Tax Rate (EMTR), leaving them with almost no net gain in income and trapping them near the bottom of the distribution.
5. Asset Prices and Wealth Disparities: Rapid inflation in housing and equity markets benefits property and share owners, widening the economic divide between asset owners and low-income renters who must spend a larger proportion of their earnings on housing.
Key Takeaway for Section 3: Absolute poverty changes based on general real income growth, infrastructure, and survival shocks. Relative poverty changes based on how low incomes move relative to the median, influenced by welfare policy, tax structures, labour market flexibility, and structural shifts.
---4. Common Pitfalls to Avoid in the Exam
Examiners repeatedly highlight the following mistakes. Learn these traps now to protect your marks!
Trap 1: Confusing Relative Poverty with Income Inequality
The Fix: Relative poverty specifically measures the proportion of people living below a fixed threshold (\(60\%\) of median income). Income inequality looks at the overall spread and dispersion of income across the entire population (measured via Lorenz curves and Gini coefficients).
Trap 2: Assuming Economic Growth Automatically Cures Relative Poverty
The Fix: Strong GDP growth almost always reduces absolute poverty because real incomes rise. However, if the gains from growth go mainly to middle- and higher-income earners, the national median income will rise faster than bottom-tier incomes. As a result, relative poverty can stay the same or even increase during a boom!
Trap 3: Forgetting to mention PPP for Absolute Poverty
The Fix: When quoting the World Bank figure (such as \(\$2.15\) per day), always state that it is measured in Purchasing Power Parity (PPP) terms to account for differences in local price levels.
Trap 4: Confusing Income and Wealth
The Fix: Poverty is defined primarily as an insufficiency in the flow of income or consumption over time, whereas wealth is an accumulated stock of financial and physical assets.
5. Quick Revision Summary
• Absolute Poverty: Inability to meet basic physical survival needs (food, water, shelter). World Bank threshold: \(\$2.15\) per day at PPP.
• Relative Poverty: Living substantially below society's standard of living (social exclusion). UK/EU threshold: Household income below \(60\%\) of national median disposable income.
• Key Absolute Drivers: Real GDP growth, clean water/health infrastructure, safety nets, conflict/natural disasters.
• Key Relative Drivers: Benefit indexation vs. wage growth, tax progressivity, zero-hour contracts/automation, poverty traps (high EMTR), and minimum wage policies.