4.1.7.2 The problem of poverty Flashcards
(14 cards)
What is the difference between absolute and relative poverty?
Absolute: Living below subsistence (<$1.25/day, lacks basic needs).
Relative: Below 60% of median income (UK) or societal standard (US).
Example: A family in Somalia in absolute poverty vs. a UK worker earning £15,000/year (relative).
List 7 economic causes of poverty.
Unemployment
-Cyclical (recessions) and structural (skills mismatch) unemployment lead to income loss.
Long-term unemployment can trap people in poverty.
Poor Education & Skills
-Low qualifications → low productivity → low wages → poverty.
Poor Health & Healthcare
-Limits work ability and earning potential.
Wage Differentials
-Large pay gaps between high/low-skilled jobs increase relative poverty.
Bad Luck (Born into Poverty)
-Children in low-income/single-parent households face lower earning potential.
Tax Cuts for the Wealthy
-Reduces government revenue for welfare, widening income inequality.
Subsistence Agriculture (Developing Countries)
-Focus on farming over education keeps families in poverty.
Low education → low-wage jobs/unemployment.
Underemployment (part-time/temporary work).
Structural unemployment (e.g., deindustrialisation in UK).
List 3 non-economic causes of poverty.
Wars/conflicts (displacement, destroyed assets).
Corruption (wealth concentration among elites).
Natural disasters (e.g., Nepal earthquake 2015 → 1M into poverty).
How does poverty impact health?
Malnutrition → poor cognitive development, higher disease risk.
Lower life expectancy (e.g., Sub-Saharan Africa).
Data: 22% of India’s poverty limits growth.
How poverty limits growth:
Reduced Productivity:
Poverty can lead to a decline in the overall productivity of an economy. When a significant portion of the population is living in poverty, they may be less likely to invest in education, training, and skills development. This can lead to a less productive workforce, which in turn hinders economic growth.
Decreased Consumption:
Poverty can reduce demand in the economy. When a large part of the population has limited purchasing power, aggregate demand may be lower, leading to reduced investment and economic activity.
Lower Human Capital Development:
Poverty can impede human capital development, which is crucial for long-term economic growth. Lack of access to quality education, healthcare, and nutrition can limit the potential of individuals to contribute to the economy.
Increased Inequality:
Poverty and inequality can create social unrest and instability, which can further limit economic growth. When a large segment of the population is marginalized, it can create social tensions that can disrupt economic activity.
Reduced Savings and Investment:
Poverty can also reduce savings and investment, which are essential for long-term economic growth. When individuals have little disposable income, they are less likely to invest in new businesses or productive assets.
Lower Labor Force Participation:
Poverty can also lead to lower labor force participation, as individuals may be forced to prioritize survival over working. This can reduce the size of the workforce and further limit economic growth.
Addressing Poverty and its Impact:
To address poverty and its impact on economic growth, India could implement policies that focus on:
Promoting inclusive growth:
Focus on policies that benefit all segments of society, including the poor. This can include investments in education, healthcare, and infrastructure.
Improving access to credit and finance:
Providing access to credit and financial services for poor individuals and businesses can help them invest in their livelihoods.
Investing in human capital:
Investing in education, healthcare, and nutrition can improve the skills and productivity of the workforce.
Promoting entrepreneurship:
Supporting entrepreneurship and small businesses can create new jobs and opportunities for individuals in poverty.
Implementing social safety nets:
Providing social safety nets can protect vulnerable populations from the impact of economic shocks.
By addressing poverty, India can unlock its economic potential and achieve sustainable and inclusive growth.
What are 3 societal impacts of poverty?
Crime (desperation/theft).
Poor housing/sanitation (disease spread).
Mental health issues (stress from instability).
Why is education limited by poverty?
Child labor (work vs. school choice).
Poor literacy → perpetuates intergenerational poverty.
Example: Nepalese children post-earthquake.
How do UK policies exacerbate poverty?
Regressive taxes (VAT hits poor harder).
Benefits lag wages (index-linked to inflation).
Source: Guardian on UK inequality (link).
Key Idea:
When wages rise with inflation (e.g., due to cost-of-living adjustments), state benefits (welfare payments) often increase more slowly because they are index-linked to inflation with a time delay. This means real incomes for benefit recipients may fall over time, worsening income inequality and relative poverty.
Detailed Explanation:
1. How Wages and Benefits Adjust to Inflation
Wages → Often adjust quickly in response to inflation (especially in strong labour markets or with union bargaining).
Benefits (e.g., Universal Credit, pensions, disability payments) → Typically uprated annually based on past inflation data (e.g., September CPI for April increases).
- Why Benefits Lag Behind Wages
Time Lag in Indexation: Benefits are adjusted based on past inflation, but if prices rise rapidly (e.g., during a cost-of-living crisis), benefits do not keep up with current wage increases.
Example: If inflation spikes to 10% in 2023 but benefits are only raised by 6% (based on last year’s inflation), recipients lose purchasing power.
Political Decisions: Governments may freeze benefits or use a lower measure (e.g., CPI instead of RPI) to save costs.
- Consequences of Benefits Lagging Wages
Relative Poverty Rises: If wages grow faster than benefits, low-income households fall further behind.
Real Income Decline: Benefit recipients see their purchasing power shrink if inflation outpaces adjustments.
Increased Inequality: The gap between workers and welfare-dependent households widens.
- Evaluation (AQA Exam-Style Analysis)
✅ Possible Justification for Lag: Prevents welfare dependency and encourages work.
❌ Criticism: Hurts the most vulnerable (disabled, pensioners, low-income families), worsening equity issues.
Example (UK Context)
In 2022-23, UK inflation hit 11%, but benefits only rose by 3.1% (based on previous year’s CPI).
Result: Real-terms cuts for benefit claimants, while wages (in some sectors) kept pace with inflation.
Conclusion (AQA Exam Focus)
Microeconomic Link: This issue relates to income distribution, poverty, and market failure (inequitable outcomes).
Policy Debate: Should benefits be pegged to wages instead of inflation? Would this reduce poverty traps?
What is hysteresis in poverty?
Long-term unemployment → skill erosion → harder to re-enter workforce.
Example: UK manufacturing decline → structural unemployment.
Give an example of absolute poverty.
Sub-Saharan Africa: Disease + lack of investment → 41% live on <$1.90/day (World Bank).
How can governments reduce poverty?
Minimum wage laws (protect low earners).
Education subsidies (break poverty cycle).
Progressive taxation (redistribute income).
Draw a Lorenz curve showing high poverty/inequality.
Curve bows far from 45° line (e.g., bottom 20% earn 5% income).
Is relative poverty a useful measure?
Yes: Reflects societal exclusion (e.g., UK’s 60% median threshold).
No: Ignores absolute needs (someone may be ‘relatively poor’ but not starving).
How does poverty relate to market failure?
Cause: Discrimination, monopoly power.
Consequence: Underinvestment in human capital → lower productivity.
