Poverty Traps (DP IB Economics)
Revision Note
Written by: Steve Vorster
Reviewed by: Jenna Quinn
Understanding Poverty Trap
There are many causes of poverty. However, poor countries have several common characteristics which can be summarised in a poverty cycle diagram
Poverty is caused by a lack of both economic growth and human development
Development
Low wages: represent the intersection of economic growth and human development and are the major cause of poverty
Low wages are usually the result of unemployment, informal employment, a lack of skills, or a primary sector based economy
Low levels of education and healthcare: cost money and with lower wage levels these are not accessible
People find it harder to stay well or to recover from illness
Low levels of human capital: low education and healthcare lead to low levels of human capital, which reduces productivity
Low productivity: results in low wages and the cycle continues
Growth
Low wages: represent the intersection of economic growth and human development and are the major cause of poverty
Low saving: with low wage levels it is much harder to save as any money is spent on necessities
Low investment: savings drive investment as firms are able to borrow money from commercial banks. Low levels of savings mean that banks have less money available for investment
Low economic growth: low levels of investment hold back productivity and economic growth
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