4.2 - Poverty and Inequality Content

Question 1

4.2 - Poverty and Inequality

What does the difference between HDI and IHDI represent?

Answer 1

The ‘loss’ in potential human development because of poverty.

Question 2

4.2 - Poverty and Inequality

What is absolute poverty

Answer 2

When a household does not have sufficient income to sustain even a basic acceptable standard of living to meet peoples basic needs
Is a multi-dimensional about more than very low income per capita
World bank - less than $2.15 a day

Question 3

4.2 - Poverty and Inequality

What is relative poverty

Answer 3

• Income compared to other people - those living below a certain threshold income.
• In the UK and the EU, a household is in relative poverty if they are living in a household with income below 60% of median household income.
• Poverty line for a single working age adult is £141 a week.
• Around 1/5 of people in the UK live in relative poverty.

Question 4

4.2 - Poverty and Inequality

Causes of Absolute Poverty

[5]

Answer 4

1. Absence of basic government/public services: Lack of education, healthcare, and welfare systems traps individuals in poverty by limiting human capital development and access to opportunities.
2. Endemic corruption in government and business: Misuse of public funds and resources undermines poverty-alleviation efforts, perpetuates inequality, and erodes trust in institutions.
3. Low rate of formal employment: Prevalence of insecure, low-wage jobs restricts income growth and economic stability, keeping households in poverty
4. Severe household savings gap: Inability to save or invest due to extreme income deprivation creates a poverty trap, blocking access to education, healthcare, or income-generating assets
5. Absence of basic property rights: Lack of legal ownership (e.g., land titles) limits access to credit, markets, and wealth-building opportunities, stifling economic mobility.

The causes are often complex and multi-causal

Question 5

4.2 - Poverty and Inequality

Causes of Relative Poverty

[5]

Answer 5

1. Cuts in top rate income taxes, the wealthy get wealthier
2. Surging executive pay and high rewards for skilled workers compared to other employees
3. Regressive effects of higher food and energy prices on poorer households
4. Deep market failures in access and affordability of good quality education, health & basic housing
5. Declining strength of trade unions in many countries and the rising monopsony power of some big employers

Question 6

4.2 - Poverty and Inequality

What is the UN’s Multi-Dimensional Poverty Index (MPI), and what key insights does it provide?

Answer 6

The Multi-Dimensional Poverty Index (MPI) measures poverty beyond income by assessing deprivations across 10 indicators in health (child mortality), education (years of schooling), and standard of living (Access to drinking water). Key findings (2019):

• 23% of people (1.3 billion) in 101 countries lived in multidimensional poverty.
• Two-thirds of these individuals reside in middle-income countries.
• Over half are under 18, highlighting youth vulnerability.

The MPI evaluates progress against sustainable development goals to reduce severe deprivation in emerging and developing nations.

Question 7

Why does Piketty argued more eco. development eventually increases inequality?

Answer 7

Due to the higher rate of return on capital.
(Rich get richer e.g. can mortgage more houses to rent out).

Question 8

4.2 - Poverty and Inequality

What is the Lorenz curve?

Answer 8

A visual indicator of inequality in an economy.

(Here it shows 20% of people have 5% of income).

Question 9

4.2 - Poverty and Inequality

How is the Gini coefficient calculated?

Answer 9

Gini Coefficient = Area of A / Area of A + Area of B.

Question 10

4.2 - Poverty and Inequality

What Gini coefficient value represents perfect equality? Perfect inequality?

Answer 10

0
1 or 100

Question 11

4.2 - Poverty and Inequality

What are the two types of lorenz curves?

Answer 11

Income inequality
Wealth inequality

Question 12

4.2 - Poverty and Inequality

What are the two axis’ for the lorenz curve?

Answer 12

% of income = y
% of population = x

Question 13

4.2 - Poverty and Inequality

What is the Gini coefficient?

Answer 13

A numerical indicator of wealth and income distribution and inequality.

Question 14

4.2 - Poverty and Inequality

Draw a lorenz curve showing a reduction in inequality:

Answer 14

(New curve moves closer to the line of equality)

Question 15

4.2 - Poverty and Inequality

What are cause of inequality within countries

[8]

Answer 15

• Education, training and skills
• Trade unions
• Benefit system
• Pension payments
• Wage rates
• Employment Legislation
• Tax Structure
• Asset Ownership

Question 16

4.2 - Poverty and Inequality

How is Education, Training and Skills a cause of inequality within countries

Answer 16

• The higher the skill level the higher the level of income.
• A country with a poor education system will see greater inequality than one with a good education system
• Education being a barrier to entry to a job

Question 17

4.2 - Poverty and Inequality

How is Trade Unions a cause of inequality within countries

Answer 17

• Countries with strong trade union membership tend to have higher levels of income.
• With low trade union membership, the exploitation of workers through low wages is easier

Question 18

4.2 - Poverty and Inequality

How is a benefit system a cause of inequality within a country

Answer 18

Countries that provide a range of benefits (such as unemployment, disability, child support, housing support etc) raise the income of the lowest 20% of the population resulting in more equal distribution

Question 19

4.2 - Poverty and Inequality

How is pension payments a cause of inequality within a country

Answer 19

• State pension payments ensure a minimum standard of living for retirees resulting in a more equal distribution of income.
• Countries without it have a much higher percentage of pensioners living in poverty

Question 20

4.2 - Poverty and Inequality

How is wage rates a cause of inequality within a country

Answer 20

• The purpose of a national minimum wage is to improve the equity in the distribution of income.
• Without it, more households would be earning less and inequality would increase

Question 21

4.2 - Poverty and Inequality

How is employment legislation a cause of inequality within a country

Answer 21

Generally, the more workers are protected by law, the better the income distribution in an economy e.g. maternity benefits ensure that new mothers have a higher level of income during the first months of leave after a birth

Question 22

4.2 - Poverty and Inequality

How is tax structure a cause of inequality within countries

Answer 22

• Progressive tax systems allow all income earners to contribute to public revenue according to their ability.
• Decreasing taxes on the lower end and increasing it on the upper end would mean that the system is more progressive and there would be a more equal distribution of income

Question 23

4.2 - Poverty and Inequality

How is asset ownership a cause of inequality within countries

Answer 23

• Assets generate income.
• The more equal the asset ownership in an economy the less the inequality in income distribution.
• This was one reason why the UK government changed the law in 1980 allowing council house tenants the right to buy their property at a discounted rate.
• It is also a reason for the current shared ownership scheme

Question 24

4.2 - Poverty and Inequality

Causes of inequality between countries

Answer 24

1. Human Capital Deprivation: Limited education and health access trap generations in poverty, reducing workforce potential and gender equality.
2. Financial Exclusion & Debt Traps: Lack of affordable credit forces reliance on predatory lenders, stifling investment and perpetuating poverty cycles.
3. Technological Marginalization: Unequal tech access hinders productivity and innovation, perpetuating reliance on low-value industries.
4. Structural Commodity Dependence: Overreliance on commodity exports with low bargaining power traps economies in volatile, low-income cycles.
5. Demand-Side Stagnation: Low wages and weak consumer demand create a cycle of underinvestment, stifling domestic economic growth.

Question 25

# 4.2 - Poverty and Inequality What is the Kuznets hypothesis?

Answer 25

Inequality increases as an economy develops and moves from agriculture to industry. Then it improves through rebalancing (by the govt.). + inequality falls.

Question 26

# 4.2 - Poverty and Inequality Give the Kuznet hypothesis curve:

Answer 26

Inequality against economic growth

Question 27

# 4.2 - Poverty and Inequality What is the evaluation to Kuznet's hypothesis?

Answer 27

Piketty theory

Question 28

# 4.2 - Poverty and Inequality What are the consequences of poverty and inequality in developing countries?

Answer 28

1. **Low Savings Ratio** Causes: * Poverty: Most people live hand-to-mouth → no money to save. * Inequality: Wealth is hoarded by a small elite → no savings from the majority. Consequence: → Banks have little money to lend → businesses can’t expand → economy stays stuck in poverty. 2. **Trade Imbalance (Import Dependency)** Causes: * Inequality: Rich elites buy luxury imports (cars, gadgets) → money flows out of the country. * Poverty: Poor can’t afford local goods → weak demand for domestic products. Consequence: → Country spends more on imports than it earns → foreign debt rises → economic crisis risks. 3. **No New Businesses (Lack of Entrepreneurship)** Causes: * Poverty: People can’t save → no startup capital for small businesses. * Inequality: Banks ignore the poor → only the rich get loans, but they may not invest locally. Consequence: → Fewer jobs and innovations → economy relies on low-wage work → poverty cycle repeats.

Question 29

# 4.2 - Poverty and Inequality What is the significance of capitalism for poverty and inequality?

Answer 29

* Capitalism creates inequality because it requires incentives for it to work - e.g. entrepreneur = profit; workers = wages * Entrepreneur & workers rewarded according to risk, productivity and ability - But capitalism not just about creating inequality… * Wealth, tax revenue and jobs it creates has lifted living standards for all and millions out of poverty - Relative poverty still a problem in developed countries

Question 30

# 4.2 - Poverty and Inequality To what extent is high income and consumption inequality an inevitable consequences of operating a capitalist system

Answer 30

High income and consumption inequality can be a natural outcome in capitalist systems due to two main factors: * **Profit Motive** * Firms focus on maximizing profits, often leading to significant dividend flows to shareholders, which can widen inequality. * Some businesses, however, pursue a social enterprise model, reinvesting profits for social or environmental benefits. * Mitigating measures include progressive taxation on high profits and incomes, as well as competition policies to limit monopoly behavior and keep consumer prices low. * **Labour Market Dynamics** * Wages in competitive markets are determined by supply and demand, which can allow top executives and scarce-skill workers to command very high pay, while low-wage workers without strong bargaining power see little improvement. * Interventions such as minimum wage legislation, legal caps on executive pay, stronger employee protections (especially in gig and flexible jobs), and government investment in human capital can help balance the distribution of income.

Question 31

# 4.2 - Poverty and Inequality What did piketty argue

Answer 31

Thomas Piketty’s core argument is that **capitalism naturally leads to rising wealth inequality over time**. He uses historical data to show that when the return on capital (profit from wealth, e.g., rent, dividends, or investments, abbreviated as r) is higher than the economic growth rate (growth of incomes/output, abbreviated as g), wealth concentrates in the hands of those who already own assets.

Question 32

# 4.2 - Poverty and Inequality Critics of Piketty

Answer 32

Critics of his say that capital has helped to make the world to make the world more equal. Point of the impact of globalisation driving by increasing specialisation, trade and the diffusion of new technologies as helping to reduce extreme poverty and reduce the gap in per capita incomes between countries. World is now more equal than it was in 1950, around the same levl as 1850