Poverty
Economic Development
Poverty is a lack of the income and resources needed to enjoy an acceptable standard of living. Economists distinguish two kinds, and the syllabus asks you to know the difference between them.
Absolute poverty
Absolute poverty is a situation in which people cannot afford the minimum essentials needed to stay alive and healthy, such as food, clean drinking water, shelter, basic clothing and access to healthcare.
The level of income needed to buy these essentials is roughly the same everywhere, so absolute poverty is measured against a fixed line. The World Bank's widely cited line is about $3.00 a day (at 2021 purchasing-power-parity prices), a figure it revises from time to time. Anyone living below it is in absolute poverty. Absolute poverty is far more common in developing countries, where a large share of the population may live below the line.
Relative poverty
Relative poverty is when a household's income is below a chosen proportion of the average (usually the median) income in its own country.
A common threshold is less than 60% of median household income. Because the threshold rises as a country gets richer, relative poverty measures inequality rather than survival: a household counted as relatively poor in a high-income country might still be above the global absolute-poverty line. Relative poverty is the main measure used in developed countries, where almost no one is in absolute poverty but income gaps still cause hardship.
Common exam question
Telling absolute from relative poverty
Question: Pick what describes relative poverty, or which kind of poverty a change raises or lowers (1 mark, multiple choice).
Set in 4 of the 13 multiple-choice papers. Absolute poverty is judged against survival: being unable to afford necessities such as food and shelter, or an income below a fixed minimum line. Relative poverty is judged against the rest of society: a living standard below what that society regards as the acceptable minimum. Lacking necessities, or never seeing a doctor, is absolute poverty.
For a change, ask whether people can still afford necessities (absolute) and whether the poor fall further behind (relative): a recession leaving the jobless unable to pay rent or buy food raises both. Pensions rising more slowly than prices raise relative poverty; more investment in education lifts low earners' pay and reduces it. Wrong options reverse this: higher benefits or a higher minimum wage reduce poverty, and a lower minimum wage or contractionary fiscal policy will not.