There are two completely different questions hiding inside the word poverty. Can this household afford to eat, keep warm and stay healthy? And can this household afford to live the way people around them live? The first is absolute poverty. The second is relative poverty. Mixing them up is the fastest way to lose marks on this topic.
📚 What you need to know
Absolute poverty: income too low to afford the basic necessities — food, shelter, water, clothing, healthcare.
Relative poverty: income far below the typical income in that society, usually below 50% or 60% of the median household income.
Absolute poverty is measured against an international poverty line set by the World Bank and revised as prices change.
Relative poverty is the main form of poverty found in developed countries; absolute poverty is concentrated in developing ones.
Single indicators measure one thing (access to clean water, energy use per person). Composite indicators combine several.
The Multidimensional Poverty Index (MPI) measures deprivation across health, education and living standards using ten indicators.
Poverty is self-reinforcing: the poverty cycle explains why it persists across generations.
Absolute poverty: can you meet basic needs?
Absolute poverty uses a fixed standard. Below a certain income, a person cannot buy enough food, safe water, shelter, clothing and basic healthcare to stay healthy. That standard does not move when a country gets richer.
The World Bank sets an international poverty line so that countries can be compared using the same yardstick, adjusted for purchasing power. The figure is revised every few years as prices change: it has moved from $1.25 to $1.90, then $2.15, and has since been raised again. The important thing for an exam is not the exact number but what it represents — an income floor below which basic survival needs go unmet.
Use whatever figure the extract gives you, and say it is expressed in purchasing power parity terms so that a dollar means the same basket of goods in every country. That single sentence shows you understand why the line is not simply converted at market exchange rates.
Relative poverty: can you live like everyone else?
Relative poverty compares a household with the rest of its own society. The usual threshold is 60% of median household income (some countries use 50%). Because the threshold moves with the median, relative poverty is a measure of exclusion, not starvation.
This is why relative poverty can stay flat even when every household gets richer: the yardstick grows too.
WORKED EXAMPLE
Median household income is $32,000. Using a 60% threshold, calculate the relative poverty line and identify which households are in relative poverty. [3]
Household
Annual income
A
$18,500
B
$21,000
C
$12,400
Step 1: find the threshold0.60 × $32,000 = $19,200Step 2: compare each householdA: $18,500 < $19,200, so in relative povertyB: $21,000 > $19,200, so not in relative povertyC: $12,400 < $19,200, so in relative povertyLine = $19,200; households A and C are in relative povertyUse the median, not the mean. A few very high incomes drag the mean up and would give a misleadingly high threshold.
WORKED EXAMPLE
Explain how a household can become better off and still be counted as in relative poverty. [3]
Step 1: growth raises the medianMedian rises 20%: $32,000 → $38,400New threshold = 0.60 × $38,400 = $23,040Step 2: the household’s income rises more slowly$20,000 rises 10% to $22,000Step 3: compare$22,000 < $23,040, so still below the lineBetter off in absolute terms, still in relative povertyThis is the key difference: absolute poverty can fall to zero, but relative poverty can only fall if the distribution changes.
Beyond income: measuring what poverty does to people
Income alone is a crude proxy. Two households on the same income can have very different lives if one has clean water and a nearby school and the other does not. That is why economists use additional indicators.
Indicator
What it measures
Strength and weakness
International poverty line
The share of people living below a fixed daily income, adjusted for purchasing power
Simple and comparable, but a single income cut-off ignores everything money cannot buy locally
Minimum income standard
The income a household needs for a standard of living that society regards as acceptable
Grounded in what people actually think is decent, but varies by region and by who is asked
Single indicators
One dimension at a time: access to safe water, electricity use per person, girls completing primary school
Easy to collect and target, but each on its own gives a very partial picture
Multidimensional Poverty Index
Deprivation across health, education and living standards, using ten weighted indicators
Far richer picture and can be broken down by region or ethnicity, but relies on survey data and weighting choices
The three dimensions of the MPI
Health — child mortality and nutrition.
Education — years of schooling completed and school attendance.
Living standards — cooking fuel, sanitation, drinking water, electricity, housing and basic assets.
A household is counted as multidimensionally poor if it is deprived in at least one third of the weighted indicators. Because the index can be broken down by region, ethnicity or dimension, it tells policymakers not just how many people are poor but in what way — which is what you actually need in order to fix it.
Why composite beats single. A country can raise average income while child nutrition stays terrible. The MPI catches that; an income measure does not. Use this whenever a question asks you to evaluate a measure of poverty.
The poverty cycle
Poverty persists because each consequence of being poor becomes a cause of staying poor. Break in at any point and every other stage improves — which is exactly why so many different policies can all reduce poverty.
Because the loop is closed, a policy that improves any single stage — schooling, health, credit, infrastructure — weakens every other stage too.
Why poverty is so hard to measure
It is multidimensional. Income, health, education, housing and security all matter, and no single number captures them all.
Self-reported survey data is unreliable. People forget, round, or under-report income earned informally, and the poorest are often hardest to reach.
The informal economy is invisible. In many developing countries a large share of income never appears in official statistics.
Urban and rural poverty differ. The same income buys very different things in a city and a village, and rural households may produce much of their own food.
Households are treated as one unit. Income is not always shared equally inside a household, so poverty among women and children can be hidden.
Thresholds are arbitrary. Moving the relative line from 60% to 50% of the median instantly changes the reported poverty rate without anyone’s life changing.
Data is patchy by group. Figures broken down by age, gender and disability are often missing entirely, so the worst-affected groups go unrecorded.
💡 Exam tip
Open with the definition that matches the question. Absolute and relative poverty need different diagrams, data and policies.
Use the median, never the mean, for the relative poverty line, and say why.
Show the calculation even when it is one line: 0.60 × median. Method marks are free marks.
Name the three MPI dimensions if a question mentions composite indicators. Specificity scores.
Link poverty to the earlier topics: unemployment and low wages are the main routes into poverty in most economies.
For evaluation, argue that reducing absolute poverty and reducing relative poverty may need different policies — growth for one, redistribution for the other.
⚠ Common mix-up
Absolute and relative poverty. A household can escape absolute poverty and remain in relative poverty for life.
Poverty and inequality. Related but distinct: poverty is about a threshold, inequality about the spread.
Using mean income for the relative line. High earners pull the mean up and inflate the threshold.
Assuming growth automatically ends poverty. If the gains go to the top, absolute poverty may fall slowly and relative poverty may rise.
Treating the international poverty line as fixed forever. It is revised as prices and national poverty lines change.
Describing the poverty cycle as a list. It is a loop — say that each stage feeds the next and back to the start.
Up next: Taxation and Policies to Reduce Inequality — the tools governments actually reach for, and what each of them costs.
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