IB Economics - Understanding Poverty in Economics

This study note for IB economics covers Understanding Poverty in Economics

1. Introduction

Poverty is a significant issue in both developing and developed economies. It affects millions of people worldwide and is a major concern for policymakers and economists. Understanding the different types of poverty and the causes and consequences associated with it is crucial for tackling this issue effectively.

2. Distinguishing Between Absolute Poverty and Relative Poverty

Absolute Poverty

• Definition: Absolute poverty refers to a condition where individuals lack the basic necessities of life, such as food, clean water, shelter, and clothing. The World Bank typically defines it as living on less than $2.15 per day (as of 2022, adjusted for inflation).
• Characteristics:
  • Individuals cannot afford essential resources needed for survival.
  • Often prevalent in developing countries.
  • Measured by a fixed standard, which does not change with the overall living standards of society.
• Real-World Example: In 2020, the World Bank estimated that around 9.2% of the world’s population lived in extreme poverty, a situation exacerbated by the COVID-19 pandemic.

Relative Poverty

• Definition: Relative poverty is a condition where individuals' income or resources are significantly lower than the average in their society, leading to an inability to participate fully in typical economic, social, and cultural activities.
• Characteristics:
  • Not about mere survival, but about living with dignity and participating in society.
  • More relevant in developed countries where basic needs are generally met.
  • Measured relative to the living standards of the majority in a society, often defined as earning less than 50-60% of the median income.
• Real-World Example: In the European Union, relative poverty is defined as those living on less than 60% of the median income. In 2021, approximately 16.8% of the EU population was considered at risk of poverty.

3. Possible Causes of Poverty

Low Incomes

• Explanation:
  • Individuals with low incomes cannot afford basic necessities, pushing them into poverty.
  • Low-income jobs often lack benefits like health insurance and retirement savings, increasing financial vulnerability.
• Real-World Example: Many minimum wage workers in the United States live near or below the poverty line, particularly in states where the minimum wage has not kept pace with inflation.

Unemployment

• Explanation:
  • Unemployment leads to a complete loss of income, making it difficult for individuals to meet their basic needs.
  • Long-term unemployment can result in skill depreciation, making it harder for individuals to find new employment.
• Real-World Example: The global financial crisis of 2008 resulted in massive unemployment, pushing millions into poverty, especially in countries like Greece and Spain.

Lack of Human Capital

• Explanation:
  • Human capital refers to the education, skills, and health that individuals possess, which make them productive and employable.
  • Lack of education and skills reduces employment opportunities and earning potential, leading to poverty.
• Real-World Example: In many Sub-Saharan African countries, limited access to education results in a lack of skilled workers, perpetuating cycles of poverty.

4. Possible Consequences of Poverty

Low Living Standards

• Explanation:
  • Poverty results in insufficient income to afford decent housing, nutritious food, and other essentials, leading to poor living conditions.
  • Poor living standards can affect physical and mental health, perpetuating poverty across generations.
• Real-World Example: Slums in cities like Mumbai, India, illustrate how poverty results in overcrowded, unsanitary living conditions.

Lack of Access to Health Care

• Explanation:
  • Poverty often means a lack of access to necessary health services, leading to untreated illnesses and high mortality rates.
  • Poor health can reduce productivity and increase medical costs, trapping individuals in poverty.
• Real-World Example: In the United States, individuals without health insurance are less likely to seek preventative care, leading to worse health outcomes and higher long-term costs.

Lack of Access to Education

• Explanation:
  • Education is a key driver of economic mobility. Without access to quality education, individuals are less likely to escape poverty.
  • Poor educational outcomes are both a cause and consequence of poverty, creating a vicious cycle.
• Real-World Example: In rural areas of countries like Afghanistan, the lack of schools and educational infrastructure limits children's opportunities, perpetuating poverty.

5. Glossary of Key Terms

• Absolute Poverty: A condition where individuals lack the basic necessities of life.
• Human Capital: The skills, education, and health that individuals possess, which contribute to their productivity.
• Living Standards: The quality of life based on income, employment, class disparity, poverty rate, housing affordability, and hours of work required to purchase necessities.
• Median Income: The income level at which half the population earns more and half earns less.
• Relative Poverty: A condition where individuals' income is significantly lower than the average income in their society, limiting their ability to participate fully in social and economic life.
• Unemployment: The state of being jobless and actively looking for work.
• Vicious Cycle of Poverty: A situation where poverty causes factors that in turn perpetuate poverty, such as poor education leading to low-paying jobs.

6. Possible IB Economics Essay Questions

• "To what extent is relative poverty a more significant issue than absolute poverty in developed economies?"
• "Evaluate the effectiveness of government policies in reducing poverty caused by unemployment."
• "Discuss the role of education in breaking the cycle of poverty in developing countries."

7. Economists to Explore

• Amartya Sen: Nobel laureate known for his work on welfare economics, poverty, and human development.
• Joseph Stiglitz: Economist who has written extensively on income inequality, poverty, and the failures of globalization.
• Esther Duflo and Abhijit Banerjee: Economists who focus on poverty alleviation strategies and development economics, winners of the Nobel Prize in Economics in 2019.

8. Real-World Data

• Global Poverty Rates: As of 2020, approximately 689 million people live in extreme poverty on less than $2.15 per day.
• Income Inequality in the USA: The top 1% of earners in the United States hold more wealth than the bottom 90%, exacerbating relative poverty.

9. Retrieval Questions

1. What is the difference between absolute poverty and relative poverty?
2. How does unemployment contribute to poverty?
3. What are some of the consequences of poverty for individuals and societies?
4. How does lack of human capital perpetuate poverty?
5. What is the World Bank’s threshold for extreme poverty?
6. Why is access to education important in breaking the cycle of poverty?
7. Can you explain what is meant by the 'vicious cycle of poverty'?
8. How might government policies address the issue of relative poverty?
9. What are some of the real-world impacts of relative poverty in developed countries?
10. Name an economist who has contributed significantly to the study of poverty and summarise their key ideas.