The Causes of Poverty (Cambridge International IGCSE Economics)

Absolute and relative poverty

Spec point — 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

• Absolute poverty is when a person cannot afford basic necessities like food, clean water, shelter, and clothing. It is usually defined as living on less than $2.15 per day (World Bank, 2022)

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

Relative poverty

• 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

Spec point — 5.2.2 · "• unemployment • low wages • illness • age • environmental factors"

Causes of poverty

• Poverty means not having enough income to meet basic needs such as food, shelter, education, and healthcare
• People can fall into poverty for many reasons, often beyond their control

1. Unemployment

• People without jobs have no regular income, making it hard to afford basic needs
• Long-term unemployment increases the risk of falling into absolute poverty
• Families may rely on others or government support, which is often not enough

2. Low wages

• Some people are employed but earn very low incomes (known as the working poor)
• Wages may not be enough to cover rent, food, and healthcare
• This is common in jobs with no minimum wage, informal work or underemployment

3. Illness

• Serious illness or disability can stop people from working
• Medical treatment is expensive in many countries, pushing families into poverty
• Lack of access to affordable healthcare can make the problem worse

4. Age

• Elderly people may no longer earn income and rely on savings or pensions
• In countries without state pensions or elderly support, older people are at higher risk of poverty
• Similarly, children in poor households face higher risk of poverty due to dependency

5. Environmental factors

• Natural disasters (e.g. floods, droughts, earthquakes) can destroy homes, crops, and jobs
• Climate change and poor land quality can reduce agricultural income
• In rural areas, poor infrastructure can limit access to markets, schools and hospitals

The poverty trap

Spec point — The poverty trap

• The causes of poverty mentioned above, often trap people in a negative cycle which is called the 'poverty trap'

Poverty is caused by a lack of both economic growth and human 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

• 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

Exam Hint The term 'the poverty trap' and the diagram are not required for your exams. However, we have included it as it provides a good framework for understanding poverty – and how poverty can be tackled. We will refer to this diagram again when we look at the solutions to poverty