Poverty

Absolute Poverty – It is where people do not have access to basic items (1), such as food, shelter and
clothing (1) or are living on less than eg $ 1.25 a day

Relative Poverty –
1. It is where people are poor relative to other people in the economy (1), i.e. they have access to
fewer goods and services than others (1)
2. Relative Poverty always exists (1)
3. People who are relatively poor in one country (developed country) may be quite well off compared
to the poor in another country (developing country) (1)

Analyse why the elimination of absolute poverty would not solve the economic problem.
1. Absolute poverty is lack of access to basic necessities (1) example e.g. food/living below a certain
income level e.g. $1.25 (1)
2. The economic problem is unlimited wants (1) exceeding finite resources/scarce resources/scarcity
(1)
3. Even if everyone had access to basic necessities, people would still want more products (1) e.g.
better quality food (1) there would not be enough resources to meet people’s increasing wants (1)
relative poverty will still exist/rich will still be able to spend more than the poor (1)
4. Over time what is considered to be absolute poverty is likely to change (1)

Discuss whether govt. policies can always reduce poverty in a developing country [8]

How to reduce Poverty?

Fiscal Policies – used to redistribute income and wealth by using a combination of taxation and
government spending policies.
1. Taxation
a. Progressive Tax systems – to reduce the gap between rich and poor by charging high taxes
on the incomes of rich people and using those tax proceeds to support the poor people.
b. Lowering of direct taxes (income tax and corporation tax) may increase consumer
spending and investment – creating job opportunities
2. Govt. spending
a. Increased govt. spending on education will increase the skills of the people increasing their
employment opportunities and earning potential
b. Increased govt. spending on health care may keep people healthier, again increasing their
ability to earn
c. Increased govt. spending on infrastructure will create job opportunities for people working
in construction industries and their income levels might go up
d. Increased govt. spending on unemployment benefits will enable poor to purchase basic
necessities
e. Increased govt. spending will add to the AD which will encourage firms to produce more
increasing employment opportunities
*However (of govt. spending)
a. Increased govt. spending on education may not improve the quality of education.
b. Increased govt. spending may also lead to an increase in the AD of the country – leading to
demand pull inflation which will reduce a poor’s ability to buy basic necessities
c. Increased govt. spending on benefits may increase reliance on benefits which in the long
run may make person unwilling to take up work and just enjoy benefits being provided to
him by the govt.
d. Increased govt. spending may be financed by higher taxation which may put unnecessary
burden on the working people.

However (of Fiscal Policy)

1. All the points written in the “However (of govt. spending)” can come here.
 2. Increased govt. spending and lowering of taxes may benefit the rich more and this will increase
the levels of relative poverty in the country.

Point no. 3 and 4 written below are for answers specially related to questions like – discuss
whether fiscal policy measures will reduce poverty.

3. Reduced govt. spending may lower demand – reduce output and increase unemployment
4. Increasing taxes – may reduce the spending power of the poor and may also act as disincentive to
work

Monetary Policies – used to control money supply by manipulating interest rates and exchange rates.
1. Low interest rates
a. It is the cost of borrowing
b. Lower interest rates – increases consumer spending – increases AD – encourage firms to
expand – increases employment opportunities – raises incomes – reduces poverty levels
c. May enable poor people to borrow to
i. Educate their children which in long run will help in reducing poverty
ii. Setting up their own businesses which provide them with incomes

2. Low exchange rates will make exports cheaper and will increase the demand for country’s exports
– this will increase the scale of operation of exporting units which in turn will increase the demand
for labour increasing income levels in the country.

Supply Side Policies – used to boost the long run productive capacity of an economy.
1. Labour market reforms to improve the efficiency and productivity of the workforce. The
introduction of a national minimum wage, or imposing a higher minimum wage rate, can improve
the standards of living for low income households.

2. Govt. may encourage the setting up of MNCs to provide jobs and incomes and teach employees
new, more advanced skills
a. They provide jobs to the local people – which increases their income level and living
standards especially if the firm pays wages above a country’s minimum wage (1)
b. High income levels results in higher government tax revenue (1) which could be
used to improve
i. Education – increasing skills of the people in the long run and providing
them with better career opportunities.
ii. Health services – making people healthier and increasing their ability to
earn.
c. Employees will acquire skills or receive training when they will work with these
MNC’s (1) which will improve their future employment prospects (1)
d. Higher wages or wages paid to the previously unemployed people will increase the
level of demand in an economy – this will increase other firms output resulting in a
further rise in demand for labour.
However,
a. The MNCs may just replace domestic firms, leaving the number of jobs unchanged.
b. The multinational company may decide to relocate to another country in the future
(1), making the employee redundant (1)
c. The MNC may have kept Top jobs for the workers from their home country and may
have created jobs for unskilled locals only.
d. They may be Capital Intensive and so may increase the demand for Capital Goods
more than demand for labour.
However (of govt. policies)
1. the retraining/education initiatives will have no effect if the level of demand in the economy is so
low (1) that there are no jobs to be applied for (1)
2. the effect of the introduction of a minimum wage will ultimately depend on the rate at which it is
 set (1); if it is set at too low a rate, the impact will be negligible (1)
3. it is less an issue of whether particular policies can have an effect (1); it is linked to the extent of
the policies, i.e. how far-reaching are they? (1)
4. there may be government failure e.g. in form of corruption (1) which prevents funds reaching the
poor (1)