This section of the Cambridge IGCSE Economics (0455) syllabus requires students to understand the difference between absolute poverty and relative poverty.

There is no universally accepted definition of poverty as it is a relative term and can mean different things to different people in different parts of the world. Economists define poverty as a condition that exists when people do not have enough money or resources to sustain a minimum standard of living deemed to be humanly decent, such as access to health, education, clean water and sanitation. Poverty is a real problem, with the United Nations (UN) predicting that 160,000,000 children are at risk of continuing to live in extreme poverty by 2030. The UN defines poverty as "a lack of income and productive resources to ensure sustainable livelihoods".

Poverty creates huge social and economic problems for a country. These issues include but are not limited to the opportunity costs of poor health, premature deaths, higher crime rates, higher levels of unemployment, the need for increased government welfare provision, and lower real national output (real GDP).

The Joseph Rowntree Foundation, the well-known British charity, defines poverty as "poverty is when your resources are well below your minimum needs." Recall from Unit 1.1 that needs are the basic necessities that humans must have in order to survive. This includes being able to afford to eat, keep clean, and stay warm and dry. The consequences of poverty, according to the Joseph Rowntree Foundation include:

The United Nations defines overall poverty as “a lack of income and productive resources to ensure sustainable livelihoods”, although acknowledges that poverty has wider implications. These interrelated manifestations include:

In 2015, the United Nations set its Sustainable Development Goals (SDGs) to be achieved by 2030, with the first of these goals being "No Poverty." This highly ambitious goal aims to eradicate extreme poverty and promote economic empowerment for all.

 Watch this informative video from World Vision Australia about the meaning of poverty. Pay attention to the characteristics and nature of poverty mentioned in this video. Importantly, make note of the fact that economists recognise different dimensions of poverty and that poverty is much more than a low income. World Vision is global charitable organisation that works with children, families, and communities to overcome poverty and injustice.

There are two categories or types of poverty - absolute and relative poverty.

Absolute poverty

Absolute poverty is the condition that exists when people's income, savings, and productive resources are insufficient to meet their basic human needs. The Joseph Rowntree Foundation calls this state "destitution", i.e., when people cannot afford to eat, keep clean, or stay warm and dry. This is why absolute poverty is sometimes referred to as extreme poverty.

Characteristics of absolute poverty include:

• When an individual or household cannot sustain a basic acceptable (decent) standard of living, i.e., they are unable to meet their basic needs for human survival, such as food, clothing, warmth, and shelter.

• There is outright poverty, i.e., those experiencing absolute poverty are undeniably extremely poor.

In September 2022, the World Bank changed its key measure of the International Poverty Line (IPL) from $1.95 to $2.15 per person per day. This figure represents the World Bank's new extreme poverty line.

The chart below shows the countries where the highest percentage of people continue to live in absolute (extreme) poverty. As of 2019, the latest year available with the World Bank, more than a third of people in Sub-Saharan Africa lived below the international poverty line of $2.15 per day. The most affected countries were Madagascar (MG), the Democratic Republic of the Congo (CD), Tanzania (TZ), Haiti (HT), and Yemen (YE).

Several countries in the Americas and Asia also had a high proportion of people who lived below the poverty line, e.g., Bangladesh (BD), Honduras (HN), India (IN), Laos (LA), and Pakistan (PK), where extreme poverty affected between 13.5% percent and 4.9% of people.

Source:Statista

Relative poverty

Relative poverty refers to the state of having fewer resources and less income in comparison to the average person in the economy. The United Nations (UN) defines relative poverty as household income less than 50% of the median. Hence, those in relative poverty tend to have a lower standard of living in relation to the average person in society. People in relative poverty may struggle financially to access basic human necessities such as food, warmth, housing, education, and healthcare.

Unlike absolute poverty, relative poverty is a comparative measure of poverty. It measures the extent to which an individual or household’s financial means fall below that of the median income of the population.

Relative poverty creates social, political, and economic problems. For example:

• Relative poverty can lead to social exclusion and discrimination against certain groups in society.

• Poverty is associated with low levels of education, which can result in a lack of employment opportunities for individuals and households.

• Those in relative poverty may become "trapped" in poverty, e.g., individuals who are unemployed may not have enough income to meet their basic needs, leading to further poverty.

Hence, individuals and households in poverty struggle to improve their standard of living.

Furthermore, although a country experiences economic growth over time, the benefits are not evenly distributed across the population despite an increase in real GDP per capita. Hence, this creates greater levels of relative poverty in the economy.

  Although there is no universally accepted measure of poverty, this informative video from Wold Vision Australia discusses numerous methods used by economists to measure human well-being, including methods such as the Human Development Index (HDI).