Economics of inequality and poverty

Absolute poverty: lacking the minimum income to meet basic needs (food, shelter, clean water, healthcare) — measured by the World Bank at $2.15/day (PPP). Relative poverty: having significantly less income than the average in your society — often below 50–60% of median income.

At the macro level, the Lorenz curve and Gini coefficient compare inequality between countries and track how inequality changes as economies grow. A more bowed Lorenz curve or higher Gini (closer to 1) indicates greater inequality within a nation.

GDP per capita measures average income but ignores: (1) income distribution — it can hide huge inequality, (2) health and education outcomes, (3) environmental sustainability, (4) non-market activity like subsistence farming. A country can have high GDP per capita but poor living standards for most people.

The HDI is a composite measure of development scored from 0 to 1, combining three dimensions: (1) Health — life expectancy at birth, (2) Education — mean years of schooling and expected years of schooling, (3) Income — GNI per capita at PPP.

Yes. If economic growth benefits the rich more than the poor, absolute poverty falls (more people above $2.15/day) but the gap between richest and poorest widens, increasing relative poverty. China is a key example — hundreds of millions lifted out of absolute poverty, but inequality widened.

The Kuznets curve hypothesis suggests that as a country industrialises, inequality first increases (as some benefit from new industries) and then decreases (as wealth spreads more broadly), forming an inverted-U shape. Evidence is mixed — the outcome depends heavily on government policy.

The MPI captures deprivations across three dimensions — health, education, and living standards — using 10 indicators. A person is MPI-poor if deprived in at least one-third of the weighted indicators. It goes beyond income to capture the lived experience of poverty.

Using the World Bank's international poverty line of $2.15 per day (purchasing power parity). Anyone living below this threshold is considered to be in absolute poverty. PPP adjusts for differences in price levels between countries.

No. Growth is necessary but not sufficient. It must be inclusive — reaching the poorest through jobs, education, and social protection. Without redistribution, growth may benefit the rich disproportionately, leaving absolute poverty high and widening relative poverty.

Relative poverty is about having much less than others in your society, not about survival. Even in high-income countries, if income is unevenly distributed, those earning below 50–60% of the median are relatively poor. They cannot fully participate in the normal activities of their society.

South Korea reduced inequality alongside rapid growth (contradicts the early rise). India and Brazil have seen inequality widen even as growth continued (contradicts the later fall). This shows that government policy — progressive taxation, education investment, and safety nets — determines whether growth reduces inequality.

Composite indicators give a fuller picture of development by capturing multiple dimensions (health, education, income, living standards). They reveal cases where high income doesn't mean high well-being — e.g., an oil-rich state may have high GDP per capita but low HDI due to poor education.

Life expectancy — reflects health outcomes and quality of life. Another is the literacy rate, which measures education. Both are useful but narrow: life expectancy ignores income and education quality, and literacy rate tells nothing about health or income levels.

Absolute poverty can be reduced through economic growth alone (raising everyone above the poverty line). Relative poverty requires redistribution — progressive taxation, transfers, and public services — because growth alone may widen inequality if benefits are not shared.

Progressive taxation (taxing higher incomes more), investment in education and healthcare (equalising opportunity), social safety nets (unemployment benefits, pensions), and targeted transfers to the poorest. These shift the Lorenz curve toward the line of equality.

Unequal access to education, labour market discrimination (gender, race), unequal ownership of assets (land, capital), weak or regressive tax systems, globalisation and technology (benefiting skilled workers), institutional factors (corruption, weak rule of law), and geography/conflict.

High inequality can lower aggregate demand — the poor have a higher marginal propensity to consume, so concentrating income among the rich means less total spending. It also wastes human potential — talented people trapped in poverty can't develop their skills, reducing productivity.

Progressive taxation and transfers, investment in education and healthcare, minimum wages, anti-discrimination legislation, land reform and asset redistribution, and social safety nets (unemployment benefits, cash transfers, food programmes).

Those with less education earn lower wages and have fewer job opportunities, trapping them in low-income roles. In developing countries, barriers to education (cost, distance, gender norms) are particularly severe. Education gaps reinforce intergenerational poverty.

Progressive taxation takes a larger share from higher earners and redistributes it through transfers (pensions, benefits) to lower-income groups. This shifts the Lorenz curve toward the line of equality and raises the income floor for the poorest.

Reduced social cohesion and trust, worse physical and mental health outcomes across society, intergenerational poverty (children born poor are more likely to stay poor), and democratic erosion — extreme wealth concentration can distort political power.

High taxes may reduce incentives to work and invest; generous welfare may create dependency; minimum wages may cause job losses if set above the equilibrium wage. Every policy has trade-offs — effectiveness must be evaluated in context.

Extreme inequality can lead to protests, crime, and political instability, which deters domestic and foreign investment. Firms are less willing to invest in unstable environments, reducing economic growth and job creation — creating a vicious cycle.

Globalisation and technology reward skilled, educated workers with higher wages while low-skilled workers face wage stagnation or job displacement through automation and offshoring. The benefits of global trade and tech innovation are not evenly distributed.

Domestic causes: education gaps, discrimination, weak tax policy. Global/structural causes: unfair trade patterns, colonial legacies, climate vulnerability, being landlocked. In exams, distinguishing the two shows deeper analysis and earns higher marks.

Bolsa Família is a conditional cash transfer programme — poor families receive payments conditional on children attending school and getting vaccinated. It has reduced extreme poverty and improved educational outcomes in Brazil, making it a widely studied success story in inequality policy.

Intergenerational poverty means children born into poverty are more likely to stay poor as adults — due to worse education, health, and fewer opportunities. Inequality reinforces this cycle because the poor cannot invest in their children's human capital.

Education equalises opportunity — it raises the productivity of lower-income workers, increases their earning potential, and reduces structural unemployment. It breaks the cycle of intergenerational poverty by giving children from poor families the skills to earn higher incomes.

The IB syllabus stresses that inequality matters for economic outcomes — not just fairness. High inequality can slow growth (reduced AD, wasted potential), reduce efficiency (under-investment in human capital), and undermine stability (social unrest deterring investment).

Wealth (land, capital, shares) is distributed even more unequally than income. Asset owners earn returns (rent, dividends, capital gains) that compound over time, widening the gap. Without inheritance taxes or land reform, wealth inequality persists across generations.