Written by
Eliot King— First-Class BSc (Hons) Economics, University of Bath · 6+ years teaching A-Level Economics · Edexcel A, Edexcel B, AQA and OCR
Specification Coverage: AQA unit 1.7.2 - the
Problem of Poverty. Students should be able to distinguish between
absolute and relative poverty, and understand the causes and
consequences 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 Human Capital Development→Lower Skills and Poor Health→Lower Productivity→Lower Incomes→Unable to Save→Lower Investment in Human Capital of Next Generation→Lack of Human Capital Development→Poverty Trap
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.