1.7.2 The Problem of Poverty

Key Definitions

Absolute poverty exists when individuals cannot afford the basic necessities for survival, such as food, water, shelter, and healthcare.

It is measured against a fixed international threshold, for example, the World Bank's poverty line of $2.15 per day (2022 PPP).

Relative poverty exists when household income is below a certain proportion of median income in an economy.

In the UK, for example, relative poverty is defined as having an income below 60% of the median household income.

Causes of Poverty - the Poverty Trap

There are two main causes of poverty which can cause a poverty trap/cycle:

Lack of Economic Growth

Lack of Human Capital Development

Economic Consequences of Poverty

• Lower productivity - poor nutrition and healthcare can lead to lower productivity and lower economic growth via limited LRAS growth.
• Lower tax revenue - low incomes mean less tax revenue for the government, which can limit public spending on infrastructure and services.
• Higher government spending - governments may need to spend more on welfare payments and social services to support those in poverty.
• Loss of skills - individuals in poverty may not have the opportunity to develop their skills, leading to a less skilled workforce.
• Social unrest - high levels of poverty can lead to social unrest, crime, and political instability, which can deter investment and economic growth.