Causes of Poverty (Cambridge (CIE) O Level Economics)

Absolute and Relative Poverty

• Poverty is a situation where a person lacks the financial resources to sustain a basic standard of living 

• Economists distinguish between 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 $1.90 a day

  • Absolute poverty is more prevalent in developing countries than 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

  • E.g. The UK defines relative poverty as households that are living with less than 60% of the median household income

    • In May 2022, the median UK monthly household income was £2072/month

    • This meant that the relative poverty line was any household earning less than £1243,20/month

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

Causes of Poverty

• There are many causes of poverty. However, poor countries have several common characteristics which can be summarised in a poverty cycle diagram

• 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 

• Education and healthcare cost money and with lower wage levels these are not accessible, resulting in poor human capital

  • People find it harder to stay well or to recover from illness resulting in lower productivity and shorter life expectancy  

• Low productivity results in low wages and the cycle continues

• Populations with a large number of dependents (old people and children) for each working household tend to experience higher levels of poverty