Absolute and relative poverty Topic 9: aggregate demand and aggregate supply Absolute and relative poverty

4.2. Poverty and inequality 4.2.1 Absolute and relative poverty 4.2.2 Inequality

4.2.1 Absolute and relative poverty Students should be able to: Distinguish between absolute poverty and relative poverty Analyse measures of absolute poverty and relative poverty Evaluate causes of changes in absolute poverty and relative poverty

What is absolute poverty? Microeconomics Topic 1: The Economic Problem What is absolute poverty? How does the World Bank measure it? In 2008, the World Bank set the poverty line at $_______ a day at 2005 GDP measured at purchasing power parity. Some economists measure the poverty line at $___ a day.

What is relative poverty? Microeconomics Topic 1: The Economic Problem What is relative poverty? Relative poverty exists when a How is it measured? It is measured in comparison with In the EU, people falling below ____% of median income are said to be ‘at-risk-of-poverty’ and are said to be relatively poor.

Microeconomics Topic 1: The Economic Problem What is median income? Microeconomics Topic 1: The Economic Problem Median income is the amount that divides the income distribution into two equal groups, half having income ________ that amount, and half having income ________ that amount. Mean income (often called average) is the amount obtained by dividing the total aggregate income of a group by the number of units in that group. Note that both mean and median income are averages.

Top 10 countries with largest share of poverty (2010) Microeconomics Topic 1: The Economic Problem Top 10 countries with largest share of poverty (2010)

% of population living on less than $2 a day Microeconomics Topic 1: The Economic Problem % of population living on less than $2 a day

What causes changes in poverty? Microeconomics Topic 1: The Economic Problem What causes changes in poverty?

4.2.2 Inequality Students should be able to: Distinguish between wealth and income inequality Analyse measures of income inequality: the Lorenz curve (diagrammatic analysis) and the Gini coefficient Evaluate causes of income and wealth inequality within countries and between countries Analyse the impact of economic change and development on inequality Evaluate the significance of capitalism for inequality

Wealth versus income inequality Wealth refers to Wealth inequality relates to differences in: Income is a ______ concept Therefore, income inequality relates to differences in:

Measures of inequality: the Lorenz curve Lorenz curves plot cumulative share of income (or wealth) against the cumulative share of the population with that income (or wealth) “A” represents the area between the diagonal line and the Lorenz curve and “B” represents the area under the Lorenz curve

Measures of inequality: the Lorenz curve The straight 45° line shows total equality The further the curve is from the 45° line, the ____________ the income inequality in society

Measures of inequality: the Gini coefficient To determine the degree of inequality, the Gini coefficient may be calculated: G = A ÷ (A + B) The Gina coefficient will have a value between 0 and 1, with 0 representing absolute ___________ (the 45° line) and 1 representing absolute __________ (the Lorenz curve would lie along the horizontal and vertical axis)

Causes of income inequality Topic 9: aggregate demand and aggregate supply Causes of income inequality

Topic 9: aggregate demand and aggregate supply Figures Year top tax rate basic rate VAT 1978 % % 8% 1988 % 22% % 2016 45% % % Year Minimum wage 1998 £3.60 2005 £ 2015 £ 2016 £ (living wage)

Wealth and causes of wealth inequality Wealth may be through owning: Wealth may be accumulated through: Inequality arises because of:

What happens as a country develops? As a country develops and its GDP grows from a subsistence economy, inequality initially ________ and then ______________ (Kuznet’s curve) Industrialisation results in increased inequality as workers move from the lower productivity and lower paid __________ sector into the higher productivity manufacturing sector but with ___ pay. However, at some point, inequality starts to decrease. This may be because ______________ have more resources to redistribute income through the tax and benefit system.

Distribution of resources in a capitalist economy In a capitalist society individuals are able to _____ themselves out to producers to _________ income Individuals may own physical capital (assets e.g. _________) and/or financial capital (e.g.________) and receive income: dividends or rent The amount they receive depends on supply and __________ Workers with few skills are likely to receive low __________ Those with no wealth or income may be supported by:

Significance of capitalism for inequality Inequality in a free market economy is inevitable, since Private ownership of resources means that some people Some argue that inequality is essential in a capitalist system because?

Why does the UK government provide some support? The welfare stare is designed to ensure greater _______________ The UK government believe that the market mechanism produces an allocation of resources which is sub-optimal from an equality viewpoint and so they _____________ to correct it.

Income inequality and Lorenz curve exam question Topic 9: aggregate demand and aggregate supply Income inequality and Lorenz curve exam question With reference to Figure 2, describe what has happened to income inequality in Russia. Illustrate your answer with a Lorenz curve diagram. (8) June 2014 Q4b

How might relative poverty fall despite the gini coefficient rising? Topic 9: aggregate demand and aggregate supply How might relative poverty fall despite the gini coefficient rising? With reference to the information provided, examine possible reasons why the proportion of the population in relative poverty in Russia has declined despite the Gini coefficient increasing over the same period. (10) June 2014 Q4c