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CIE IGCSE Economics Your notes
5.2 Poverty
Contents
5.2.1 Causes of Poverty
5.2.2 Policies to Alleviate Poverty
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5.2.1 Causes of Poverty
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Absolute & Relative Poverty
Poverty is a situation where a person lacks the financial resources to sustain a basic standard of living
Economists distinguish between absolute & relative poverty
Absolute poverty is a situation where individuals cannot afford to acquire the basic necessities for a
healthy & safe existence
These necessities include shelter, water, nutrition, clothing & 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
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Causes of Poverty
There are many causes of poverty. However, poor countries have several common characteristics Your notes
which can be summarised in a poverty cycle diagram
Poverty is caused by a lack of both economic growth & human development
Low wages represent the intersection of economic growth & human development & 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 & healthcare cost money & 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 & shorter
life expectancy
Low productivity results in low wages & the cycle continues
Populations with a large number of dependents (old people & children) for each working household
tend to experience higher levels of poverty
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5.2.2 Policies to Alleviate Poverty
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Policies Aimed At Alleviating Poverty
The poverty cycle diagram (below) was introduced in the previous subtopic & helps to explain the
causes of poverty
Any policy that helps to break the poverty cycle at any point will help to improve the standards of
living within a country
Policies used to alleviate poverty include promoting economic growth, improving education,
providing more generous state benefits, progressive taxation, & the establishment/increase of a
national minimum wage
Policies which help to improve any factor in the diagram will help to alleviate poverty
How Different Policies Alleviate Poverty
Policy
Explanation Impact on Poverty Cycle
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Promoting economic Removing protectionism or engaging in Higher growth → higher
growth expansionary demand & supply-side wages → better
policies will promote growth education/healthcare → Your notes
Data shows that economic growth has a better human capital →
very positive impact on economic better productivity → higher
development income
In most cases growth precedes
development
Often in less developed countries,
economic growth is linked to one industry &
generates many negative externalities of
production possibly resulting in decreased
living standards
Improving education Investing in this supply-side policy Higher education/skill levels
increases the potential output of the country → higher human capital →
(shifts the production possibility frontier increased productivity →
outwards) higher output → higher
income
More generous state State benefits are usually given to the More benefits → higher
benefits poorest & most vulnerable people in wages → better
society education/healthcare →
State benefits include unemployment & better human capital →
disability payments, pension payments, better productivity → higher
heating discounts, public transport wages
subsidies etc.
Progressive taxation A progressive tax system redistributes from Higher redistribution
those with higher income to those with lower → better
income & reduces income inequality education/healthcare →
Redistribution often starts with the provision better human capital →
of free education & healthcare better productivity → higher
Sometimes the benefits of a good income
progressive tax system are eradicated by
the penalties imposed through multiple
regressive (indirect) taxes
Establishment/increase Minimum wages are set above the free Higher wages → better
of national minimum market rate education/healthcare →
wage Firms are not allowed to pay anyone less better human capital →
than the legal rate
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better productivity → higher
wages
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