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IB DP Economics — Unit 3: Macroeconomics | SL | 3.4 Economics of Inequality and Poverty
📋 What You Will Learn
- Define absolute poverty, relative poverty, and the poverty cycle and distinguish between them
- Explain how absolute poverty is measured using the International Poverty Line and national poverty lines
- Explain how relative poverty is measured and why it differs from absolute poverty
- Identify and explain composite measures of poverty and development: the Human Development Index (HDI) and the Multidimensional Poverty Index (MPI)
- Analyse the strengths and limitations of each measure of poverty
- Evaluate which measure of poverty is most useful for policymakers in different economic contexts
🔍 Guiding Question Can a single number ever capture the full reality of poverty — and does the way we measure poverty determine the policies governments choose to fight it?
🌍 Why This Matters In 2024, the World Bank reported that approximately 700 million people live on less than $2.15 per day — the international extreme poverty line. Yet in the United Kingdom, a family earning three times that amount per person would still be classified as living in relative poverty. Two countries, two entirely different definitions of poverty, two entirely different policy responses. The measure you choose changes who counts as poor — and who gets help.
What Is Poverty?
Poverty is not simply about having little money. It is about lacking the resources — income, assets, access to services — needed to meet basic human needs and participate in society. Economists distinguish between different types of poverty because the causes, consequences, and policy responses differ significantly depending on how poverty is defined and measured.
📖 Definition — Poverty Poverty is a state in which individuals or households lack sufficient resources to meet their basic needs or to achieve an acceptable standard of living, as defined by the society or international standard in question.
Absolute Poverty
Absolute poverty sets a fixed threshold — a minimum level of income or consumption below which a person is considered poor. This threshold does not change as average incomes in a country rise. It is anchored to the cost of meeting basic survival needs: food, shelter, clean water, and basic healthcare.
📖 Definition — Absolute Poverty Absolute poverty exists when an individual or household lacks the minimum income or consumption necessary to meet basic physical needs for survival, regardless of the living standards of others in society. The poverty threshold is fixed in real terms.
The International Poverty Line (IPL)
- Set by the World Bank — currently $2.15 per person per day (2017 PPP-adjusted), updated in 2022
- Expressed in purchasing power parity (PPP) terms to allow cross-country comparisons — $2.15 buys the same basket of goods in every country
- Previously set at $1.90/day (2011 PPP); revised upward to reflect updated price data and cost-of-living changes
- Primarily used to measure extreme poverty in low-income countries
- The World Bank also uses higher thresholds: $3.65/day for lower-middle-income countries and $6.85/day for upper-middle-income countries
National Poverty Lines
- Individual governments set their own absolute poverty lines based on the cost of a minimum basket of goods and services in their country
- Example: India's national poverty line is based on the cost of a calorie-sufficient diet plus essential non-food items
- National lines allow governments to track poverty trends within their own country over time
- They are not directly comparable across countries — a "poor" person in the US is not poor by Indian standards
💡 PPP Adjustment — Why It Matters $2.15 in the US buys very little. But $2.15 in PPP terms represents what $2.15 would buy in the US — applied to local prices in, say, Ethiopia.