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Chapter 18: Problem 14

Why do economists often use a lower poverty threshold for low-income countries than for high-income countries such as the United States? Is there a difference between relative poverty and absolute poverty? Briefly explain.

Short Answer

Expert verified
Economists use a lower poverty threshold for low-income countries than for high-income countries because the cost of living and the minimum resources required for survival tend to be lower in low-income countries. Absolute poverty measures the deprivation of basic human needs and is consistent across time and countries, while relative poverty measures income inequality within a society, and changes over time and between countries.

Step by step solution

01

Define Absolute and Relative Poverty

The first step is to understand the two key concepts. \n\nAbsolute poverty refers to a set standard which is consistent over time and between countries. The World Bank defines extreme absolute poverty as living on less than $1.90 per day. \n\nRelative poverty, on the other hand, is defined in relation to the economic status of other members of the society and is therefore more of a measure of income inequality.
02

Lower Poverty Threshold for Low-Income Countries

Now let's consider why a lower poverty threshold is used for low-income countries compared to high-income countries like the United States. This is because in low-income countries, the amount of money needed for basic survival is often less due to lower cost of living. There's also the fact that a large portion of population in these countries live with very minimal resources, and therefore the threshold must be adjusted to reflect that reality.
03

Difference Between Absolute and Relative Poverty

The main difference between absolute and relative poverty is what they measure and their implications for policy making. Absolute poverty is a measure of deprivation and is used to guide policies aimed at basic needs, like food security or access to healthcare, whereas relative poverty, being a measure of inequality, is often used to inform policies aiming at wealth redistribution.

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Most popular questions from this chapter

(Related to the Chapter Opener on page 600) In a column in the Washington Post, Robert J. Samuelson wrote, "As for what's caused greater inequality, we're also in the dark. The Reagan and Bush tax cuts are weak explanations, because gains have occurred in pretax incomes.... Up to a point, inequality is inevitable and desirable." a. What are pretax incomes? b. Do you agree with Samuelson's argument that income inequality may be inevitable and desirable? Briefly explain.

Suppose the government eliminates the federal income \(\operatorname{tax}\) and replaces it with a consumption tax. With a consumption tax, individuals pay a tax on only the part of their income they spend rather than save. Think about the effect of this change on the market for automobiles. Can you necessarily tell what will happen to the price and quantity of automobiles? Briefly explain.

What does tax incidence mean?

What is the difference between a progressive tax and a regressive tax? Give an example of each.

Jason Furman served as the chairman of the White House Council of Economic Advisers under President Obama. In an opinion column in the Wall Street Journal discussing President Trump's tax reform proposal, Furman noted the need "for seriously revamping America's inefficient business-tax system to unlock stronger economic growth." But he also observed that tax reform is even more difficult than reforming the health care system "since it touches a larger fraction of the economy and threatens more powerful vested interests." a. Briefly explain what Furman means by "powerful vested interests." b. If tax reform leads to stronger economic growth, shouldn't a majority of Congress support it even if vested interests oppose the reform? Why then has tax reform legislation been difficult for Congress to pass?
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