Inequality and Poverty: IB Economics 3.4 notes

Absolute vs relative poverty and poverty lines

Absolute poverty is the inability to afford the basic needs for survival: sufficient food, safe water, shelter, clothing and sanitation. The World Bank's international poverty line for extreme absolute poverty is $2.15 a day measured at 2017 purchasing power parity, updated in 2022 from the earlier $1.90 line. Absolute poverty can, in principle, be eliminated as incomes rise.

Relative poverty means falling below a standard of living considered normal in a particular society, usually defined as an income below a set proportion of the national median, such as 60% of median income in the EU and UK. Because it is measured against the median, relative poverty persists even in rich, growing economies: it captures exclusion and inequality rather than survival.

The Multidimensional Poverty Index

Income alone misses much of what it means to be poor, so the UNDP and the Oxford Poverty and Human Development Initiative publish the Multidimensional Poverty Index (MPI). It covers three dimensions, health, education and living standards, using ten weighted indicators including nutrition, child mortality, years of schooling, school attendance, cooking fuel, sanitation, drinking water, electricity, housing and household assets.

A person deprived in at least one-third of the weighted indicators is counted as multidimensionally poor. The MPI can reveal poverty that income figures hide, for example a household above an income line but without clean water, adequate sanitation or access to schooling, and it helps governments target specific deprivations.

Causes of poverty

Poverty has interlocking causes. Low incomes and unemployment or insecure informal work leave households unable to save or invest. A lack of education and human capital, poor health and weak infrastructure limit productivity and opportunity, while discrimination, conflict and weak institutions block access to jobs, credit and land.

These reinforce one another in a poverty cycle: low income means low saving and investment in health and schooling, which keeps productivity and future income low, passing disadvantage between generations. Breaking the cycle usually needs an external injection, such as public investment in education, healthcare or infrastructure, or access to credit.

Measuring inequality: the Lorenz curve and Gini coefficient

The Lorenz curve plots the cumulative percentage of total income (vertical axis) received by the cumulative percentage of the population, ranked from poorest to richest (horizontal axis). Perfect equality is the 45-degree line of equality, where each slice of the population receives an equal slice of income; the more the Lorenz curve bows away from that line, the more unequal the distribution.

The Gini coefficient turns this into one number: it is the area between the line of equality and the Lorenz curve, divided by the whole area beneath the line of equality. It runs from 0 (perfect equality) to 1 (one person has all income), and is sometimes quoted from 0 to 100. Nordic countries sit around 0.25 to 0.28, the United States around 0.39, Brazil around 0.52, and South Africa near 0.63, among the highest in the world.

The impact of inequality on growth and society

High inequality carries costs. Because lower-income households have a higher marginal propensity to consume, concentrating income at the top can weaken aggregate consumption. It also limits social mobility and investment in the human capital of the poor, and severe inequality is associated with worse health and social outcomes and greater political instability.

The debate is genuine, though. Some inequality can reward effort, skill and entrepreneurship and provide incentives to invest, which is why the IB expects a balanced view rather than the claim that all inequality is harmful. The economist's tension is between equity and efficiency: policies that redistribute can blunt incentives, so the question is how much redistribution improves fairness at acceptable cost to output.

Policies to reduce poverty and inequality, with evaluation

Progressive taxation, where higher earners pay a larger share of income, funds redistribution and narrows the after-tax Gini, but it can weaken work incentives and encourage avoidance or capital flight if set too high. Transfer payments such as unemployment benefits, pensions and child support directly raise low incomes, though they are costly and must be targeted to avoid dependency.

State provision of merit goods, especially education and healthcare, raises the human capital of the poor and attacks the poverty cycle at its root, but the payoff is long-term and the fiscal cost is large. Minimum wages lift the incomes of low-paid workers yet may raise unemployment if set above the market-clearing wage. In developing economies, microfinance (pioneered by the Grameen Bank in Bangladesh) and land reform widen access to capital.

A strong real-world example is Brazil's Bolsa Familia, a conditional cash transfer paying poor households provided their children attend school and receive health checks, which cut poverty and lowered inequality while building human capital. Evaluate any policy through opportunity cost, incentive effects, the risk of government failure, and the short-run versus long-run balance.

Common Paper mistakes

Do not confuse income inequality with wealth inequality: wealth (accumulated assets) is far more concentrated than annual income. Keep absolute and relative poverty distinct, since a country can cut absolute poverty while relative poverty barely moves. Always state the Gini scale you are using (0 to 1 or 0 to 100), and do not assume economic growth automatically reduces poverty, because the gains may accrue mostly to the already-rich.

How this is examined

• For a Paper 1 (b) 'evaluate policies to reduce poverty or inequality' question, develop two or three policies with evaluation (opportunity cost, incentives, short versus long run), not a long undeveloped list.
• In Paper 2 you may have to read a Lorenz curve or interpret a Gini figure: state the 0-to-1 scale and describe how far the curve bows from the line of equality.
• Keep income versus wealth, and absolute versus relative poverty, clearly separated: examiners penalise blurring them.
• Bring a specific developing-country example (Bolsa Familia, Grameen microfinance) for real-world AO4 marks.

Key terms

gini coefficientlorenz curveprogressive taxeconomic growth