Poverty Absolute poverty occurs when a person’s income is below the minimum income required to afford basic necessities for human survival (food, water, shelter, clothing). A person is in absolute poverty if they are below the poverty line, that is, their income is less than $1.25 per day (2005 PPP).
Relative poverty occurs when a person’s income is so low that they cannot afford what their society deems ‘average’ or ‘common’ goods (for example a TV in the US).
Inequality Inequality occurs when income distribution is uneven, that is, some people have more income (or wealth) than others.
The Lorenz curve is a diagrammatic representation of a country’s income inequality. A Lorenz curve is drawn by plotting a country’s cumulative population and cumulative income, starting with the poorest first. The Lorenz curve below shows that: – The poorest 10% earn only 5% of income. – The next 10% earn only 6% of income. – The richest 10% earn 25% of income.
The line of complete equality shows a country in which income is equally distributed, each 10% of the population receives 10% of income. The closer a country’s Lorenz curve is to the line of complete equality, the more equally distributed income is.
The Gini lies between 0 and 1. 0 represents complete income equality, everyone earns the same income. 1 represents complete income inequality, one person earns all the country’s income.
Causes of Poverty and Inequality Many factors could cause poverty and inequality including:
Effects of Poverty and Inequality The effects of poverty and inequality include:
1) Lost Output.
A person in poverty cannot work as hard as other people, some of the economy’s labour is not being used efficiently (or not being used at all if those in poverty are unemployed) so the economy is inside its PPF, there is lost output and a welfare loss.
2) Crime.
A person in poverty cannot afford to buy many goods or services so they may turn to illegal activities and crime to get what they want.
3) Poor Health.
A poor person may not be able to afford healthcare and consequently become ill. Also, a poor person may have to buy poor quality food, limit their calorie intake and suffer from poor nutrition.
4) Psychological Problems.
Someone in poverty may not have a job and fall into depression. Also, someone in poverty may not be able to afford to do what they want and suffer psychological problems.
Government Policies to Reduce Poverty and Inequality Government policies to reduce poverty and inequality include: – A national minimum wage to increase the income of the poorest workers. – Maybe the government could provide food subsidies or fuel subsidies for the poor. – Making the tax system more progressive so that rich people pay a higher proportion of their income in tax than poorer people. – Maybe the government could provide tax credits to help the most vulnerable poor families. – Apprenticeship schemes could be started to help the unemployed find jobs.
Kuznets Curve The Kuznets curve is an empirical observation that posits inequality rises and then falls as GDP per capita increases.
Maybe inequality causes economic growth: As income inequality rises, the rich get richer and save more (because richer people have a higher marginal propensity to save than poorer people) so banks have more funds to loan out, investment rises, AD rises, LRAS increases in the long-run so real GDP increases. Although, the rich may not save more, they may import more luxury goods causing imports to rise and AD to fall and also no increase in funds available for investment. The government must ensure the rich increase their savings as they get richer.