What is the difference between absolute and relative poverty?

Absolute poverty means lacking the resources to meet a basic-needs standard. Relative poverty means falling below a standard linked to living conditions in the surrounding society. A household can afford the stated basics and still be relatively poor.

Suppose a monthly basket of basic goods and services costs 600 currency units for a particular household type. The relative poverty line is set at 50% of median monthly disposable income. Disposable income is income after adding transfers and subtracting taxes; the median is the middle value when incomes are put in order. With a median of 1,800, the line is

$$0.50(1{,}800)=900.$$

The 50% rule is used in the OECD's poverty-rate indicator; other measures use other proportions. Our example's figures are not an official country's poverty thresholds.

Assume the households below have the same size and needs, so their disposable incomes can be compared directly.

Household B shows the difference. Its income covers the stated essentials, but it remains far below typical income in this society. It may struggle to afford goods or activities needed to take part in everyday social life, even though it passes the basic-needs test.

Now suppose prices and the basic basket remain unchanged, the median rises to 2,200, and household C's income stays at 1,000. The relative line rises to 1,100. C is now below that line, even though its income buys the same amount as before. It has fallen behind the typical household without becoming worse off in absolute terms.

A household may also become better off in real terms and still remain below a rising relative threshold. An absolute standard keeps the same purchasing power, not necessarily the same money value: the cost of its basket must be updated as relevant prices change.

The measures highlight different policy questions. An inability to meet basic needs points towards access to food, housing, healthcare and essential income support. Relative poverty also draws attention to unequal access to education and jobs, exclusion from social life, and how taxes and benefits affect different income groups. Causes can overlap: job loss may push a household below both lines. Economic growth may help some households meet basic needs without ending relative poverty if low-income groups fall further behind others.

Neither income threshold captures every household's circumstances. To compare households of different sizes fairly, incomes need an equivalence adjustment that allows for their different needs. Housing costs, disability-related needs, assets and public services can also affect living standards. Before comparing poverty rates, check that they use consistent definitions and cover comparable populations.

Take the comparison further with the poverty question in the Economics SL mock-exam questions. Explain why a household might struggle to meet basic needs, fall behind others in its society, or experience both at once.