The concept of poverty can be categorized into two distinct forms: absolute and relative.

Absolute Poverty (Extreme Poverty)

• A condition where individuals lack the minimum income required to meet the basic necessities for survival. These necessities include adequate food (to prevent malnutrition), clean water, shelter, clothing, sanitation, and essential healthcare.

• Standard: Based on a fixed, universal threshold. This standard does not change as the average income of the country changes.

• Key Focus: Survival and the ability to subsist.

• Relevance: Most commonly used when discussing poverty in developing/low-income countries, or in global comparisons.

Relative Poverty

• A condition where a household's income is significantly lower than the average standard of living within their specific society, leading to hardship and social exclusion.

• Standard: Based on a relative threshold, typically set as a percentage of the median household income in a country. This threshold changes as the national standard of living changes.

• Key Focus: Income inequality and social exclusion (the inability to participate in the normal activities and customs of that society).

• Relevance: The main form of poverty observed and measured in developed/high-income countries.

Measures of Absolute Poverty and Relative Poverty

Measures of Absolute Poverty

Absolute poverty is measured against the fixed level of income required for subsistence.

• World Bank Poverty Line: The most widely cited international measure. The World Bank currently defines extreme poverty as living on less than $2.15 per person per day (adjusted for Purchasing Power Parity or PPP).

• Basic Needs Approach (BNA): A non-income measure that assesses whether people have access to a sufficient standard of living across a basket of essentials like food, shelter, education, and health.

• Cost of Basic Needs (CBN): Calculates the monetary cost of a basket of goods and services deemed essential for a minimal standard of living.

Measures of Relative Poverty

Relative poverty is measured by comparison to the average or median income within a country.

• Percentage of Median Household Income:

  • This is the standard measure in many developed countries, including the UK.

  • A common threshold is a household disposable income (adjusted for household size) of less than 60% of the national median household income.

• Income Inequality Measures:

  • The Lorenz Curve: A graphical tool that plots the cumulative percentage of income (on the y-axis) against the cumulative percentage of the population (on the x-axis). The further the curve is from the line of perfect equality, the greater the inequality (and the more prevalent relative poverty is).

  • The Gini Coefficient: A statistical measure derived from the Lorenz Curve. It results in a number between 0 (perfect equality) and 1 (perfect inequality). High Gini coefficients indicate greater income gaps, which correspond to higher relative poverty.

Causes of Changes in Absolute Poverty and Relative Poverty

Causes of Changes in Absolute Poverty

Absolute poverty is fundamentally linked to a lack of resources in an economy, often stemming from structural issues.

• Economic Growth: A sustained increase in a country's Real GDP is the primary factor that reduces absolute poverty, as it increases overall employment, investment, and average incomes.

• Conflict and Political Instability: These increase absolute poverty by disrupting economic activity, destroying productive assets, and leading to famine and displacement.

• Lack of Infrastructure: Poor sanitation, limited access to clean water, and unreliable energy perpetuate absolute poverty by causing disease and lowering productivity.

• Debt Burdens: High levels of national debt (especially foreign debt) divert government spending away from essential social services (healthcare, education) that would otherwise reduce absolute poverty.

• Natural Disasters and Climate Change: These disproportionately impact vulnerable populations who rely on agriculture, increasing absolute poverty by destroying harvests and livelihoods.

Causes of Changes in Relative Poverty

Relative poverty is linked to how resources are distributed, which is influenced by economic structures and government policy.

• Changes in Wage Inequality:

  • When high-skilled wages rise rapidly while low-skilled wages stagnate, the gap widens. This increases the median income faster than the income of the poor, pushing more people below the relative poverty line.

  • Factors contributing to this include deindustrialisation, the growth of part-time/insecure work, and declining trade union power.

• Changes in the Tax and Benefit System:

  • Regressive Taxes (e.g., VAT/Sales Tax) take a larger proportion of income from the poor, increasing relative poverty.

  • If State Benefits (e.g., pensions, unemployment support) are increased by less than the growth in average earnings, those on benefits fall further below the median income, thereby increasing relative poverty.

• Structural Unemployment: A mismatch between the skills of the unemployed and the skills demanded by employers can lead to long-term unemployment and a reliance on benefits, thereby increasing relative poverty.

• Rising Asset Prices: Increases in the price of assets like housing or shares benefit the wealthy (who own assets) much more than the poor (who often rent). This causes wealth inequality to rise, which in turn increases income inequality and relative poverty.