Absolute and relative poverty

Overview

Absolute poverty, relative poverty and equivalisation used when measuring poverty.

What you need to know

Answer each one before you reveal it.

Questions from this subtopic

Each one with the model answer underneath.

1. 1

   Define absolute poverty.

   Model answer

   Absolute poverty exists when a household's income is below the level needed to afford the basic necessities of life: sufficient food, clean water, shelter, clothing and access to basic healthcare. It is measured against a fixed real threshold, so the standard does not rise as the country becomes richer. Because the benchmark is fixed, the number of people in absolute poverty falls whenever the real incomes of the poorest rise above it.

2. 2

   Define relative poverty.

   Model answer

   Relative poverty exists when a household's income is far enough below the typical income in its own society that the household cannot take part in the activities and living patterns most people regard as ordinary. It is measured against a moving benchmark tied to the income distribution, conventionally a share of median income. Because the threshold moves with the median, relative poverty measures the distance between the bottom and the middle rather than material deprivation in an absolute sense.

3. 3

   Explain how a relative poverty line is constructed, using a worked illustration.

   Model answer

   The line is set as a fixed percentage of median equivalised household income, with 60 per cent the most common choice, and incomes are equivalised so that households of different sizes can be compared. If the median equivalised household income in a country were £30,000 a year, the line would sit at 60 per cent of £30,000, which is 0.6 × £30,000 = £18,000. Any household with income below £18,000 would then be counted as in relative poverty. This illustrates the method rather than reporting a figure for any particular country.

4. 4

   Why can economic growth eliminate absolute poverty but not relative poverty?

   Model answer

   Absolute poverty is measured against a fixed real threshold, so if growth raises the real incomes of the poorest above that threshold, absolute poverty disappears. Relative poverty is measured against the median, which itself rises as the economy grows, so the line moves upward at the same time as incomes do. Unless the incomes of the poorest keep pace with the median, the proportion below the line does not fall, and it rises if they lag behind. Growth alone therefore cannot remove relative poverty while the distribution leaves some households below 60% of median income.

5. 5

   During a recession, median income falls faster than the incomes of the poorest households. What happens to measured relative poverty, and what does this reveal about the measure?

   Model answer

   Measured relative poverty falls, because the line is a percentage of the median and it drops faster than incomes at the bottom, so fewer households lie below it. Yet nobody is better off in real terms, and everyone may be worse off. This is the awkward feature of the measure: it records the gap between the bottom and the middle rather than the standard of living, so it can appear to improve at exactly the moment when hardship is increasing.

6. 6

   Why must an absolute poverty threshold be adjusted for inflation?

   Model answer

   The threshold represents a fixed basket of necessities, so its meaning is a real one, but it is expressed as a sum of money. If prices rise and the money threshold is left unchanged, the same nominal income buys fewer necessities, so the line quietly becomes less demanding and the measured number in poverty falls without any real improvement. Uprating the threshold in line with prices keeps the standard of living it represents constant, so comparisons across years remain meaningful.

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