Living Standards & Development Indicators

Living standards are closely related to poverty. The syllabus distinguishes two types.

Absolute poverty

Absolute poverty is a situation in which people cannot afford even the minimum essentials needed to stay alive and healthy, such as food, drinking water, housing, basic clothing and access to healthcare.

The World Bank's commonly-cited absolute poverty line is $2.15 a day (at 2017 PPP), updated periodically. Anyone living below this line is classified as in absolute poverty.

Absolute poverty is much more common in developing countries. In the world's poorest economies, a substantial share of the population may live below this line.

Relative poverty

Relative poverty is when a household's income is below a chosen percentage of the median income in that country.

For example, the UK definition treats households earning less than 60% of median household income as in relative poverty. Because it is relative, the threshold rises as the country gets richer. A household considered in relative poverty in Switzerland might be well above the absolute-poverty line worldwide.

Relative poverty is the main measure used in developed countries, where almost no one is in absolute poverty but income inequality still produces hardship.

The poverty cycle

Many poor countries (and poor households within rich countries) are stuck in a self-reinforcing loop.

1. Low wages → not enough income to invest in education or healthcare.
2. Poor education and health → low productivity.
3. Low productivity → low wages.

A large dependency ratio (many children/elderly per worker) makes the cycle worse. Breaking the cycle requires policy intervention at one or more points.

Policies to reduce poverty

The mechanisms come from earlier chapters; this topic emphasises how they apply to poverty.

• Promote economic growth. Higher GDP raises wages and tax revenue, which funds better public services.
• Improve education and training. Raises productivity and breaks the human-capital part of the cycle.
• Better healthcare. Healthier workers are more productive; sick workers cannot work consistently.
• Progressive taxation and welfare. Redistribute income to lift the lowest earners.
• National minimum wage. Sets a legal floor on wages for the lowest-paid (topic 11).
• State provision of merit goods. Education and basic healthcare free at the point of use.
• Infrastructure investment (roads, electricity, water, broadband). Unlocks productivity gains.

Effective poverty reduction usually combines several of these. No single policy is enough.