Essential definitions

Absolute poverty

Inability to meet a defined minimum standard of basic needs.

Relative poverty

Living below a specified fraction of the income standard of one’s society.

Poverty gap

The shortfall between poor households’ resources and the poverty line.

Choose the question and the poverty line

Absolute poverty means insufficient resources to meet a specified minimum-needs standard. Relative poverty means falling substantially below typical living standards in a society. A relative line may be set at a stated fraction of median disposable income. The median is the middle income when people are ranked.

If the chosen line is 60% of a median income of 30,000 currency units a year, it is 18,000 a year. An income of 17,000 lies below it. The 60% is an assumption for this example, not a universal threshold. A household can escape absolute deprivation while remaining relatively poor if typical incomes rise faster.

Count poverty and assess its depth

The headcount ratio is people below the poverty line ÷ total population × 100. With 180 out of 1,000 people below it, the ratio is 18%. It stays 18% if all 180 become poorer without anyone crossing the line. A poverty-gap measure adds information about how far incomes fall short.

Income also misses access to services. The Multidimensional Poverty Index, MPI, considers overlapping deprivations in health, education and living standards. Its global form combines the incidence of poverty with its intensity: how many people are poor and how many deprivations they face. Dimension choices, cutoffs and weights require judgement.

Match the standard to the comparison

An international poverty line uses a common purchasing-power standard. State its threshold and price base because these may change. A minimum income standard instead costs a specified socially acceptable basket, including participation needs. Local prices and choices about the basket affect the result.

Informal production, seasonal income and unequal control of resources inside households complicate measurement. Cash support may improve food purchasing, while clean water improves health without immediately raising recorded income. Use evidence that captures the intended outcome. A falling relative threshold in recession need not mean anyone's material circumstances improved.

Apply and evaluate

• Use consistent purchasing power, household definitions and dimensions across comparisons.

Real-world application

Sources and applications

• IB Economics guide: first assessment 2024, updated October 2022 · 2022-10