IB Economics Understanding Poverty

What Does It Mean to Be Poor? A Guide to Poverty for IB Economics

Target Question:

What is the difference between absolute and relative poverty in economics?

Two Cities. Two Types Of Poor People

The first is Amara, a 27-year-old mother living on the outskirts of Bamako, Mali. She wakes up before sunrise to collect water from a standpipe shared by forty families. Her two children have never seen a doctor. The roof above their one-room home is made from corrugated iron. When the rains come, it floods. Her daily income - for the entire family - is the equivalent of about £1.20.

The second is Dave, a 45-year-old delivery driver in Middlesbrough. He works five days a week, earns just above minimum wage, and technically has a full-time job. But after rent, council tax, and food, there is almost nothing left to show for the hard work. He skips meals so his kids can eat. He can't afford the school trip. He hasn't been to the dentist in four years. He doesn't think of himself as poor - but if you follow the UK government's own poor definition, he is.

Same planet but a completely different experience. And that, is the first big lesson in this topic: poverty is not a simple, one-size-fits-all concept. It's context-specific, and far more intricate than most people realise.

So, What Is Poverty?

At its most basic, poverty is a condition in which an individual, household, community, or country does not have enough money to meet their basic human needs - food, clothing, shelter, healthcare, and education.

But the key question here is how much is "enough"? Enough for what? Enough by whose standard? Enough where, exactly?

Being "poor" in Finland - one of the world's wealthiest countries - is very different from being poor in Sierra Leone or Burundi, two of the world's lowest-income nations. And within every single country, poverty varies massively too. There are wealthy people in low-income countries (Nairobi has billionaires), and there are a lot of homeless people sleeping rough in London, Paris, and New York City every single night.

So the first thing we need to understand as part of the IB Economics course is that poverty is not a homogeneous concept. It varies enormously depending on the situation, the country, and the context.

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Why Is Poverty Relevant as an Economic Issue?

In reality, I cannot blame my students for thinking at first that poverty Is more of a social issue than an economics one. Fair concept. But after reading this entry, you are going to find out why poverty matters enormously to economists.

Poverty represents economic inefficiency. When millions of people cannot access education, healthcare, or basic nutrition, they are unable to contribute productively to the economy. Their potential - as workers, entrepreneurs, taxpayers, and innovators - goes entirely to waste. Every child who doesn't finish school because of poverty is human capital and is a resource that the economy was prevented from using. Every adult too ill to work because they can't afford healthcare is lost productivity. This is why eliminating poverty is a key macroeconomic priority for governments worldwide.

The second relevant concept is the poverty trap - arguably one of the cruellest concepts in all of economics. It works like this:

Low incomes → low savings → less money for investment → lower productivity → declining GDP → even lower incomes → even deeper poverty.

So, the poverty trap - is a self-reinforcing cycle in which low incomes lead to low savings, reduced investment, lower productivity, falling GDP, and deepening poverty.

Round and round it goes. The causes and consequences of poverty feed each other in a vicious cycle that makes it incredibly difficult to escape.

Absolute vs Relative Poverty

There are two fundamentally different types of poverty, and you need to understand both of them.

Absolute Poverty

Absolute poverty is extreme poverty - the inability to access the basic human necessities required for survival. Here we can list food, clean water, shelter, healthcare, and education. If you can't access these things, you are living in absolute poverty.

So, Absolute poverty - is the condition of being unable to access basic human necessities required for survival, including food, clean water, shelter, healthcare, and education. The World Bank's international poverty line is set at $3.00 per day (2021 PPP).

This is primarily found in low-income countries, and the implications are devastating. Communities living in absolute poverty experience high death rates, high infant and child mortality, low life expectancy, and widespread preventable disease - malaria, cholera, and water contamination-related illnesses that kill children in thousands.

The World Bank has set the international poverty line - the global benchmark for absolute poverty - at $3.00 per day (measured in 2021 Purchasing Power Parity prices, updated from the old $1.90 figure). And according to the World Bank's most recent data, as of 2024 around 847 million people are estimated to live in extreme poverty - that's roughly ten times the entire population of the UK.

Sub-Saharan Africa bears the heaviest burden. As of 2024, the region accounts for 70 percent of the global population living in extreme poverty and is home to half of the world's fragile and conflict-affected countries. Poverty and fragility, it turns out, share a direct relationship.

Relative Poverty

Relative poverty is a completely different matter. It refers to having an income or consumption level below the social average within your own country - being unable to earn the minimum amount needed to maintain the average standard of living in your community.

So, Relative poverty - is having an income or consumption level below the social average within a given country; a comparative measure that differs across nations and time periods.

The key word here is comparative. Relative poverty is measured against the society you actually live in, which means it differs from country to country, and it shifts over time. In the UK, relative poverty is typically defined as having a household income below 60% of the national median.

More than 1 in 5 people in the UK - 13.4 million people - were in poverty in the period 2024-2025. Of these, 7.5 million were working-age adults, 4 million were children, and 1.69 million were pensioners. Dave the delivery driver from Middlesbrough? He's one of those 7.5 million.

So, the Minimum Income Standard (MIS) - is the lowest income level at which an individual or household can maintain a socially acceptable standard of living in a given country.

Relative poverty can lead to serious consequences - social exclusion, homelessness, mental health deterioration, and in extreme cases, suicide. It may not feel as dramatic as absolute poverty, but its impact and damage to individuals and families is very real.

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The List Of Big Poverty Thinkers

Adam Smith (1723–1790) - the godfather of economics himself argued that poverty is the inability to afford the goods and services necessary not just to sustain life, but to live with dignity. Note that word - dignity, he was talking about having enough to live as a respected member of society.

Peter Townsend (1928–2009) - extended Smith's thinking by emphasising that poverty means lacking the resources to meet a "minimal acceptable way of life" in your specific community. What's minimal in one community might be luxury in another.

Amartya Sen (b. 1933) - the Indian Nobel Prize-winning economist (Economics Nobel, 1998) took the concept even further. For Sen, poverty is the failure to achieve certain minimum capabilities - the ability to do things and be things that make for a good human life. Crucially, he argued these capabilities are not fixed across time or societies. His thinking was hugely influential in building the multidimensional approach to poverty.

The World Bank defines poverty through the international poverty line - income below the minimum needed for basic needs.

The United Nations sees poverty as a denial of choices and opportunities, and a violation of human dignity itself.

Sir Tony Atkinson (1944–2017) - one of the UK's greatest inequality economists, who mapped poverty's many faces: hunger, malnutrition, limited access to education and healthcare, homelessness, unsafe environments, social discrimination and exclusion.

It Is Not Straightforward To Measure Poverty

You'd think measuring poverty would be straightforward. Count the poor people, right? Well, not really. Measuring poverty accurately is genuinely difficult, and here's why.

Single Indicators

The most common approach is to use a single indicator - most often GDP per capita or an international poverty line.

An international poverty line sets a minimum income threshold below which a person is considered to be living in poverty. It's a global yardstick, allowing comparisons across countries. The World Bank's $3.00/day line is the most widely used example.

A national poverty line does the same thing at country level - it's the minimum income citizens need to meet their basic minimum needs for shelter, nutrition, and clothing.

There's also the Minimum Income Standard (MIS) - a research method that determines the lowest income needed to maintain a socially acceptable standard of living. The MIS can be adjusted for regional variations too, like accounting for higher housing costs in cities.

But single indicators present an obvious problem: GDP per capita tells you about average income in a country - it doesn't tell you how that income is distributed. A country could have a high GDP per capita and still have millions of people living in poverty especially if wealth is concentrated at the top. High GDP does not guarantee that everyone escapes poverty. And a single monetary measure completely ignores the non-monetary dimensions of poverty - access to healthcare, clean water, education, and so on. It's similar to trying to assess someone's health by only looking at their weight.

There are also significant problems with Purchasing Power Parity (PPP) comparisons. PPP values shift depending on location (living costs are higher in a city centre than a rural area), and they fluctuate with exchange rates over time. This makes international comparisons genuinely tricky.

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Composite Indicators: The MPI

This is where we get to the Multidimensional Poverty Index (MPI).

Developed by the United Nations Development Programme (UNDP), the MPI is a composite measure that assesses deprivation across three dimensions - health, education, and living standards - using ten weighted indicators. It includes everything from child mortality rates and years of schooling to household sanitation, access to clean water, and even the material composition of household flooring (whether it's dirt, sand, or dung). Yes, really.

So, the Multidimensional Poverty Index (MPI) - is a composite measure developed by the UNDP that assesses deprivation across health, education, and living standards using ten weighted indicators.

A person is classified as multidimensionally poor if they face deprivation in at least one-third of the ten weighted indicators. According to UNDP data, over a fifth of the world's population suffers from severe multidimensional deprivation.

The MPI is also linked directly to the UN's Sustainable Development Goals (SDGs) - specifically SDG Target 1.2, which aims to halve the proportion of people living in poverty in all its dimensions by 2030. Eradicating extreme poverty by 2030 appears highly unlikely due to slow recovery from COVID-19 impacts, economic instability, climate shocks, and sluggish growth in Sub-Saharan Africa. Only one in five countries is currently on track to achieve the target of halving its national poverty rate by 2030.

The Real Picture: Poverty in 2025 and Beyond

Let's talk about the world you actually live in.

In the UK in 2025, the government published its Child Poverty Strategy in December, promising to lift 550,000 children out of relative low income after housing costs by 2028–29 through a range of measures including removing the two-child limit and expanding free school meals.

But the scale of the challenge is massive. In 2024/25, 4 million children (27-30% of all children) were in relative poverty in the UK. And it's not evenly spread - a child born in Tower Hamlets, east London, is four times more likely to be growing up in poverty than a child born in neighbouring Richmond. This is the same city we are talking about, almost the same tube line, but completely different life opportunities.

Globally, extreme poverty remains consistently high in Sub-Saharan Africa, which had an extreme poverty rate of 46% in 2024 - nearly half the population of the entire region. Meanwhile, nearly three-quarters of all people living in extreme poverty worldwide reside in rural communities.

IB Economics Summary

Poverty is not just about graphs and theory. It's Amara and Dave and 847 million real human beings whose economic potential is being crushed by circumstances largely outside their control.

For your IB Economics exam, the key ideas are:

• The difference between absolute and relative poverty - and the fact that this distinction matters a great deal when designing economic policies

• The poverty trap as a self-reinforcing cycle

• The limitations of single indicators (GDP per capita, international poverty lines) and why composite measures like the MPI give a more accurate picture

• The challenges of measuring poverty accurately, including PPP problems and regional disparities

• The role of the World Bank, UN SDGs, and major economists in shaping how we define and address poverty

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Frequently Asked Questions

Q: What is the difference between absolute and relative poverty? Absolute poverty means being unable to meet basic survival needs - food, water, shelter, healthcare. Relative poverty means having an income below the social average in your country. Absolute poverty is about survival; relative poverty is about social exclusion and inequality within a society.

Q: What is the World Bank's international poverty line? The World Bank updated its international poverty line to $3.00 per day in 2021 PPP prices (revised from the old $1.90/day). As of 2024, around 847 million people live below this line globally.

Q: What is the poverty trap in economics? The poverty trap is a self-reinforcing cycle where low incomes lead to low savings, reduced investment, falling productivity, lower GDP, and even deeper poverty. It makes escaping poverty extremely difficult without external intervention.

Q: Why is GDP per capita an unreliable measure of poverty? GDP per capita measures average income across a country, not how income is distributed. A country can have high GDP per capita but still have millions in poverty if wealth is concentrated. It also ignores non-monetary dimensions of poverty like access to healthcare, clean water, and education.

Q: What is the Multidimensional Poverty Index (MPI)? The MPI is a composite measure developed by the UNDP that assesses poverty across health, education, and living standards using ten weighted indicators. A person is classified as multidimensionally poor if they face deprivation in at least one-third of these indicators. It gives a far richer picture of poverty than income alone.

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