Question

Why do economists often use a lower poverty threshold for low-income countries than for high-income countries such as the United States? Is there a difference between relative poverty and absolute poverty? Briefly explain.

Short answer

Economists use a lower poverty threshold for low-income countries than for high-income countries because the cost of living and the minimum resources required for survival tend to be lower in low-income countries. Absolute poverty measures the deprivation of basic human needs and is consistent across time and countries, while relative poverty measures income inequality within a society, and changes over time and between countries.

Step-by-step solution

Define Absolute and Relative Poverty

The first step is to understand the two key concepts. \n\nAbsolute poverty refers to a set standard which is consistent over time and between countries. The World Bank defines extreme absolute poverty as living on less than $1.90 per day. \n\nRelative poverty, on the other hand, is defined in relation to the economic status of other members of the society and is therefore more of a measure of income inequality.

Lower Poverty Threshold for Low-Income Countries

Now let's consider why a lower poverty threshold is used for low-income countries compared to high-income countries like the United States. This is because in low-income countries, the amount of money needed for basic survival is often less due to lower cost of living. There's also the fact that a large portion of population in these countries live with very minimal resources, and therefore the threshold must be adjusted to reflect that reality.

Difference Between Absolute and Relative Poverty

The main difference between absolute and relative poverty is what they measure and their implications for policy making. Absolute poverty is a measure of deprivation and is used to guide policies aimed at basic needs, like food security or access to healthcare, whereas relative poverty, being a measure of inequality, is often used to inform policies aiming at wealth redistribution.

Key concepts

absolute poverty

Absolute poverty is a condition characterized by a severe lack of basic human necessities such as clean water, food, shelter, and healthcare. It sets a universal benchmark for minimal living conditions across countries and throughout time. This concept helps to standardize poverty measurement globally. The World Bank defines extreme absolute poverty as living on less than $1.90 per day.
This definition remains constant irrespective of where you are in the world, allowing for consistent poverty assessment in diverse economies.

relative poverty

Relative poverty differs from absolute poverty in that it is defined by comparing an individual's economic status to that of others in the same society. It represents a societal perspective where poverty is measured in relation to the average income or living standards.

• This type of poverty is more about social inequality and the gap between the rich and the poor within a community.
• For instance, in a wealthy nation, individuals with income far below the national average might still be able to meet basic needs, but they are considered relatively poor due to the substantial income disparity.

Relative poverty highlights issues related to wealth distribution rather than mere survival.

poverty thresholds

Poverty thresholds are economic measures used to determine the minimum income level necessary for individuals to meet basic living needs. These thresholds vary from one country to another, taking into account the cost of living and other socio-economic factors.
In low-income countries, poverty thresholds are often lower because basic needs can be met with less money due to lower living costs.

• The threshold is adjusted to accurately represent the country's economic conditions and the resources available to survive.
• This approach helps in designing targeted poverty-reduction policies that fit the local economic landscape effectively.

World Bank poverty line

The World Bank poverty line is a global standard used to measure extreme poverty worldwide. It establishes a guideline for assessing whether individuals can afford a minimum standard of living. According to the World Bank, the poverty line is set at $1.90 per day for extreme poverty.
This benchmark is crucial as it provides a clear, simple measure to compare poverty levels across different countries and assess progress in tackling poverty on a global scale.

• The World Bank poverty line helps ensure consistency in poverty assessment globally, aiding international organizations and policymakers in targeting efforts effectively.