Edexcel A-Level Economics · Revision notes

4.2.1 Absolute and relative poverty

Poverty can be measured in two very different ways. One asks whether people can afford the basic necessities of life. The other asks whether they can afford what is normal in the society around them. The two measures can move in opposite directions, so it matters which one is being used. This topic covers the distinction, how each is measured and what makes each change.

Absolute and relative poverty

Absolute poverty is when a person's income is too low to meet their basic needs: food, clean water, shelter, clothing and basic health care. It is a fixed standard that does not depend on how well off anyone else is. It is most common in low-income developing countries.

Relative poverty is when a person's income is too low to afford the standard of living that is normal in their society. It is measured against the incomes of others, usually the median. A household in the UK can be in relative poverty while being far better off than someone in absolute poverty elsewhere, because it cannot afford things most people around it take for granted.

Key distinction: The distinction matters because the two can change in different ways. If incomes rise for everyone, absolute poverty falls, but relative poverty may not change at all.

Measures of absolute poverty

The international poverty line. The World Bank measures extreme poverty as living on less than $3.00 a day, adjusted for differences in the cost of living between countries (in 2021 prices). This figure was updated in June 2025 from the previous line of $2.15, to reflect newer price data. Because it is a fixed amount, it allows the number of people in extreme poverty to be compared across countries and over time.

Measures of relative poverty

In the UK and the EU, a household is usually counted as being in relative poverty if its income is below 60% of the median household income in the current year, adjusted for household size. Because the threshold moves with median income, this measure shows whether the poorest are keeping up with the rest of society.

UK figures are published before and after housing costs. Measures after housing costs show more people in poverty, because housing takes up a much larger share of low incomes.

Causes of changes in absolute poverty

• Economic growth. Rising national income, especially when it creates jobs, lifts people above the poverty line. Rapid growth in China and India over recent decades lifted hundreds of millions of people out of extreme poverty.
• Employment. A job is the main route out of poverty; unemployment pushes households below it.
• Real wages and prices. If prices of essentials such as food and energy rise faster than incomes, more households fall into absolute poverty.
• State benefits and public services. Support for those on low incomes, and free health care and education, protect households from falling below a minimum standard.
• Conflict, disease and natural disasters, which can destroy livelihoods and reverse years of progress.

Causes of changes in relative poverty

Relative poverty depends on how income is distributed, not just its level.

• Changes in benefits relative to earnings. If benefits rise more slowly than average wages, benefit-dependent households fall further behind the median.
• Unemployment, which cuts a household's income relative to those in work.
• Wage growth at the bottom compared with the middle. A rise in the minimum wage can reduce relative poverty if it lifts the lowest earners closer to the median.
• Changes in the tax system. Taxes that take a larger share from low incomes, such as VAT, can increase relative poverty.
• Household structure. Changes in the number of single-earner households or households with several children affect relative poverty.

Watch out: Relative poverty can behave in surprising ways. In a recession, median income may fall while benefits stay the same, so measured relative poverty can fall even though nobody is better off.

Key terms

Common mistakes

• Using the terms interchangeably. Absolute poverty is a fixed standard; relative poverty is measured against others.
• Assuming growth always reduces relative poverty. If incomes rise equally, relative poverty is unchanged.
• Using the mean instead of the median. The relative poverty line is based on median income.
• Treating relative poverty as unimportant in rich countries. Exclusion from normal living standards has real effects on health, education and opportunity.
• Missing the recession effect. A falling median can reduce measured relative poverty without anyone being better off.

How this has been examined

In the Edexcel papers indexed on this site, this topic has appeared in two formats:

• 25-mark "Evaluate" synoptic essay — asked once (2025)
• 5-mark "Explain" data response — asked once (2018)

Where this goes next

Poverty is closely linked to 4.2.2 Inequality, which covers how income and wealth are distributed and how inequality is measured. The role of growth in reducing poverty is developed in 4.3.2 Factors influencing growth and development, and government responses through the tax and benefit system in 4.5.2 Taxation and 4.5.1 Public expenditure.