Poverty & Inequality

Growth doesn't benefit everyone equally. This sub-theme distinguishes poverty from inequality, shows how each is measured — including the Lorenz curve and Gini coefficient — and asks what causes them.

🎯 Learning objectives — by the end of 4.4 you can…

- distinguish absolute from relative poverty and explain the causes of poverty; - distinguish wealth from income inequality; - interpret a Lorenz curve and the Gini coefficient; - explain the causes and effects of inequality.

4.4.1 Poverty: absolute & relative

Spec: 4.4.1

Key terms

Absolute poverty — Income below the level needed for basic necessities (food, shelter, clothing) — e.g. the World Bank's international poverty line.

Relative poverty — Income below a set proportion of the median in that society (e.g. below 60% of median income) — poverty relative to others.

Economic growth tends to reduce absolute poverty, but relative poverty can persist or even widen. The main causes of changes in poverty are growth, education and training, welfare benefits, the tax structure, structural change in the economy, aid, and civil wars or conflict.

4.4.2 Inequality: the Lorenz curve & Gini

Spec: 4.4.2

Wealth inequality is the uneven distribution of assets (a stock); income inequality is the uneven distribution of income (a flow). Inequality is shown by the Lorenz curve and summarised by the Gini coefficient:

Key terms

Causes & effects of inequality

- Causes within countries: differences in skills and wages, ownership of capital, and the tax-and-benefit system. Between countries: differences in development, institutions and resources. - Effects: inequality influences enterprise and incentives, savings, education, migration and even life expectancy. The role of free-market capitalism in driving inequality is much debated.

Evaluation — is inequality always bad?

Some inequality can incentivise effort, enterprise and investment, which may raise growth. But excessive inequality can damage social cohesion, limit opportunity and weaken long-run growth. The judgement depends on the degree of inequality and whether it reflects reward for effort or entrenched disadvantage.

4.4 Recap — nail these

Absolute poverty (basic needs) vs relative poverty (below a share of the median).
Wealth (assets/stock) vs income (flow) inequality.
Lorenz curve shows inequality; Gini = A ÷ (A+B), from 0 (equal) to 1 (unequal).
Some inequality may incentivise effort; too much harms growth and cohesion.