The Causes of Poverty (Cambridge (CIE) IGCSE Economics): Revision Note

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

• 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

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

• 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