Absolute and relative poverty — Edexcel A-Level Economics A
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Absolute and relative poverty explained
Measuring absolute poverty requires a fixed threshold expressed in real terms and updated only for price changes, so the same basic basket of goods and services is compared over time and across countries.
Read the full explanation
A common international approach sets a very low daily consumption line, converted using purchasing power parity so that a given sum buys a comparable basket in different countries. Measuring relative poverty requires a threshold tied to the income distribution of the country being studied, typically a percentage of median household income, with households below that line counted as relatively poor. Because the relative line moves with the median, measured relative poverty can stay constant or rise even when real incomes at the bottom improve.
Your focus
- Describe how an absolute poverty threshold is set and kept constant in real terms.
- Describe how a relative poverty threshold is derived from median household income.
- Explain why consistent income definitions, household units and equivalence scales are needed for valid poverty comparisons.
Absolute and relative poverty exam tips
Marking Points
- An absolute poverty measure uses a fixed real-terms threshold, adjusted only for inflation, so the same basic standard of living is applied over time.
- International absolute measures are converted using purchasing power parity so that the threshold represents a comparable basket of goods across countries with different price levels.
- A relative poverty measure sets the threshold as a proportion of median household income in the country concerned, so the line shifts as the median shifts.
- Both approaches require consistent choices about what counts as income or consumption, the household unit and any equivalence scale used to compare households of different sizes.
- Because the relative threshold moves with the median, measured relative poverty can remain unchanged or rise even when the real incomes of the poorest households increase.
Examiner Tips
- 💡State the threshold rule for each measure — fixed real-terms line for absolute, percentage of median income for relative — before discussing any figures.
- 💡Mention purchasing power parity whenever you discuss comparing absolute poverty across countries, and explain briefly that it equalises the purchasing power of the threshold.
- 💡When interpreting a change in a poverty measure, identify whether the threshold itself moved, since a moving relative line changes the count independently of any change in real incomes.
Common Mistakes
- Comparing absolute poverty figures across countries without adjusting for price differences: the error is treating nominal currency conversions as comparable; the correction is that international absolute lines are converted using purchasing power parity.
- Using a relative poverty line as if it measured survival: the error is applying a subsistence interpretation to a distribution-based threshold; the correction is that a relative line identifies low income compared with the median, not inability to meet basic needs.
- Ignoring the household unit and equivalence scale: the error is comparing raw household incomes of different sizes; the correction is that measures adjust income for household composition so like is compared with like.
- Assuming a rising relative poverty count proves living standards fell: the error is reading a distributional measure as a real-income measure; the correction is that the count can rise because the median rose, even if the poorest households became better off in real terms.