The Redistribution of Income (Edexcel IGCSE Economics)

What Are Inequality and Poverty?

• Equality describes situations where economic outcomes are similar for different people or different social groups

  • Income equality would mean everyone, irrespective of their job, is paid the same

  • Inequality in the distribution of income is one cause of absolute and relative poverty 

• Absolute poverty is a situation where individuals cannot afford to acquire the basic necessities for a healthy and safe existence

  • These necessities include shelter, water, nutrition, clothing and healthcare

  • In 2022, the World Bank defined absolute poverty as anyone who was living on less than $2.15 a day (the so called international poverty line)

  • Absolute poverty is more prevalent in developing countries than in developed ones 

• Relative poverty is a situation where household income is a certain percentage less than the median household income in the economy

  • Poverty in a household is considered relative to income levels in other households

  • Households that are living with less than 50% of the median household income are considered to be in relative poverty

  • Relative poverty is the main form of poverty that occurs in developed countries

Reasons to Reduce Poverty and Inequality

• Capitalism is at the heart of free market economics

• Under Capitalism, inequality is inevitable

  • Workers with higher skills receive higher wages

  • Workers with little to no skills receive little to no wage

  • Individuals with higher income will acquire more assets, leading to higher levels of income

    • In turn, they can keep on acquiring assets

    • Individuals with lower income will find it hard to acquire assets

• The principles of capitalism are considered important as the incentive to acquire income raises productivity and output

• However, the long-term outcome of capitalism is that the factors of production become concentrated in ownership, with relatively few individuals developing extreme wealth, at the expense of many who lose out

  • The existence of inequalities and poverty raises ethical concerns, particularly when certain households do have access to basic necessities and experience a lower standard of living

Reasons to reduce poverty and inequality