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

2. 4.2. Poverty and inequality
4.2.1 Absolute and relative poverty
4.2.2 Inequality

3. 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

4. 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.

5. 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.

6. 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.

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

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

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

10. 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

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

12. 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

13. 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

14. 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)

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

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

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

18. 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.

19. 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:

20. 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?

21. 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.

22. 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

23. 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