Poverty · IAL Economics

Poverty concerns inadequate resources, while inequality concerns their distribution.

Must know

Absolute poverty uses a real threshold.

Relative poverty compares resources within a society.

Thresholds and PPP bases must be stated.

Must know definitions

Absolute poverty: poverty in which people's basic survival needs are not met, regardless of the incomes of others around them.

Relative poverty: poverty measured by comparison with the average (or median) living standard within a country.

Poverty line: an income threshold below which a person or household is classified as being in poverty.

Hysteresis: the effect where prolonged unemployment (e.g. after structural change) causes workers' skills to deteriorate, making them progressively harder to re-employ.

Explain and apply

Mechanism in brief: Growth can raise household resources, but its effect on poverty depends on who receives the gains and on access to essential services. A threshold revision can change measured poverty without an immediate change in living conditions.

Distinguish: Poverty and inequality are not interchangeable; a poverty line is not a market exchange-rate conversion.

Use the extract: Identify the poverty definition, threshold, price basis and population; distinguish a real change from a measurement change.

The distinction between absolute and relative poverty

Absolute poverty exists when a person's income is so low that they cannot meet basic needs — food, clean water, sanitation, shelter, healthcare and education — regardless of how others in society are doing. Relative poverty exists when a person is poor compared with others in their own society, even if their basic needs are technically met. Absolute poverty dominates in developing countries, while most poverty in developed countries is relative — a household can be relatively poor in the UK while still being far above the absolute poverty line facing households in low-income countries.

Measures of absolute and relative poverty

Absolute poverty: the World Bank international extreme-poverty line is $3.00 per person per day in 2021 PPP international dollars (June 2025 revision). This is a purchasing-power measure, not conversion at market exchange rates. The revision incorporates new PPPs and national poverty lines; compare estimates using a consistent threshold and PPP basis.

Relative poverty

typically defined as household income below 60% of median income in a given country (used in the UK and much of the EU) — this measure automatically shifts as the whole income distribution shifts, so it captures inequality-driven poverty rather than subsistence-level deprivation.

Causes of changes in absolute and relative poverty

Factor	How it changes poverty
Economic growth	growth ↑ → incomes and employment ↑ → absolute poverty ↓, though the gains may be unevenly shared, leaving relative poverty largely unchanged or even higher
Education and training	skills ↑ → access to higher-paid jobs ↑ → poverty ↓; without it, low-skilled workers are locked into low pay or unemployment
Welfare benefits	more generous, well-targeted benefits → incomes of the poorest ↑ → poverty ↓; benefits that rise slower than average wages let relative poverty widen even while absolute poverty falls
Changes in tax structure	a shift toward regressive taxes (e.g. VAT) → low-income households bear a proportionately larger burden → poverty ↑; more progressive taxation funding redistribution → poverty ↓
Structural changes in the economy	deindustrialisation and the shift to services can cause structural unemployment and hysteresis in declining sectors → affected workers fall into poverty even as the wider economy grows
Aid	foreign aid targeted at healthcare, education, and infrastructure can raise incomes and capabilities in the recipient country → absolute poverty ↓ over time, though effectiveness depends on how well aid is used and whether it is captured by corruption
Civil wars and conflict	conflict destroys physical capital and displaces populations → production and incomes collapse → absolute poverty ↑ sharply, often for a generation

Rapid recap

Absolute poverty concerns a real minimum standard; relative poverty concerns position within society. State the threshold, price basis and population. Poverty and inequality are different measures.