Cambridge IGCSE Economics: Living standards and poverty (0455) – Revision Notes

These notes condense sections 5.1 (Living standards) and 5.2 (Poverty) of the Cambridge IGCSE Economics 0455 syllabus for examination in 2026. For full explanations, use the study guide. Then test yourself with the practice questions. Other links: the Cambridge IGCSE Economics hub, the printable checklist and the free diagnostics. All countries and figures are invented. The course is not tiered.

Definitions to know

Term	Meaning
GDP	Money value of a country’s output over one year
Real GDP	GDP adjusted for price changes
Real GDP per head	Real GDP divided by population
HDI	A 0-to-1 index combining health, education and income
Absolute poverty	Income too low to buy basic necessities (food, water, shelter)
Relative poverty	Income far below the typical income of the same society
Progressive tax	Tax whose rate rises as income rises
National minimum wage	Legal lowest hourly pay
State benefits	Payments from government to households, such as unemployment or old-age support
Income distribution	How total income is shared among households

Formulas and rules

Item	Rule
Real GDP	Nominal GDP / price index x 100
Price index	Nominal GDP / real GDP x 100
Real GDP per head	Real GDP / population
Growth per head	Real GDP growth factor / population growth factor, minus 1
GDP by spending	C + I + G + (X - M)
Average tax rate	Tax paid / income x 100
Relative poverty line	A chosen fraction (for example 50% or 60%) of median income
Quintile income	Share x 5 x mean income

Worked reminders

Real and per head. Nominal GDP 880 billion, price index 110, population 20 million. Real GDP = 880 / 110 x 100 = 800 billion. Per head = 800 billion / 20 million = 40,000.

Growth per head. Real GDP up 3%, population up 1%: 1.03 / 1.01 - 1 = 1.98%. If both rise by the same percentage, per head stays unchanged.

Progressive tax. Illustrative: 0% on the first 8,000, then 25% on the rest. Income 16,000: tax = 0.25 x 8,000 = 2,000, average rate 12.5%. Income 40,000: tax = 0.25 x 32,000 = 8,000, average rate 20%. Because the share taken climbs from 12.5% to 20%, the tax is progressive.

Relative line. Median income 18,000, line at 60%: 0.6 x 18,000 = 10,800. A household on 10,500 is relatively poor.

5.1.1 Measuring living standards

	Real GDP per head	HDI
Measures	Average output and income	Health, education and income together
Components	C, I, G, X - M, adjusted for prices, divided by population	Life expectancy, years of schooling, income per head
Advantages	Simple; available often; comparable over time and between countries	Wider than income; one number to rank; shows rich is not always developed
Disadvantages	Average hides inequality; leaves out unpaid and hidden activity, environment, health, leisure	Still an average; leaves out environment, freedom, inequality; equal weights are a judgement

Method for “Discuss which measure is better”:

1. State what each measures.
2. Give one strength and one weakness of each.
3. Say that neither shows how evenly income is shared.
4. Conclude: the HDI is broader, but you need both plus distribution data.

Simplified HDI reminder. The real index is not calculated in the course, but the idea is: scale each part to 0-1, then combine. Country H (invented) has life expectancy 68 years, with minimum 25 and maximum 85, so the health index is (68 - 25) / 60 = 0.717. With education 0.55 and income 0.48, the equal-weight average is (0.717 + 0.55 + 0.48) / 3 = 0.582. A country with higher income per head can score lower if its health or schooling is worse.

Must-know distinctions.

• Nominal means current prices; real means adjusted for price changes.
• Total means all output; per head means divided by population.
• Average means a mean across everyone; it is not the same as what a typical household receives.
• Poverty means low income and unmet needs; inequality means unequal shares. A country can have equality at a low level, or inequality alongside little poverty.

5.1.2 Why living standards and distribution differ

Between countries: natural resources; capital and technology; education and health; stable, honest institutions; trade links and geography; population growth; debt.

Within a country: ownership of land and wealth; skills and pay gaps; city versus countryside; discrimination; the tax and benefit system.

Chain: low education, so low productivity, so low wages, so low consumption and tax revenue, so little money for schools. This is a cycle that policy must break.

Distribution reminder. Mean income per head is 10,000. The poorest 20% receive 6% of income and the richest 20% receive 45%. Poorest group: 0.06 x 5 x 10,000 = 3,000 each. Richest group: 0.45 x 5 x 10,000 = 22,500 each. The richest earn 45 / 6 = 7.5 times as much. If a benefit of 1,200 goes to a poorest household, its income rises to 4,200, a rise of 1,200 / 3,000 = 40%, which narrows the gap.

Within or between? Differences between countries are about national output, institutions and resources. Differences within a country are about who owns assets, who is educated and how the tax and benefit system treats each group. Say which one the question is asking about before you answer.

5.2.1 Absolute versus relative poverty

	Absolute	Relative
Line	Fixed cost of basics	Share of median income, moves with society
Falls when	Incomes rise above basic needs	Gap to the typical household narrows
Can exist in a rich country?	Yes, but rarer	Yes, easily
Rises in a boom?	Unlikely	Yes, if the poor gain less than the median

5.2.2 Causes of poverty

• Unemployment: loses wage; long spells erode skills.
• Low wages: low skills, low productivity, weak bargaining power, part-time work.
• Illness: cost of treatment and lost earnings; can limit education.
• Age: pensioners on small pensions; children and elderly people depend on others.
• Also acceptable: lack of education, large families, discrimination, conflict, no land or capital.

5.2.3 Policies: one-line evaluation each

Policy	How it helps	Limitation
Growth	More jobs and tax revenue	Gains may go to the rich; slow; environmental cost
Education	Higher skills and wages	Costly; years before results; poorest may not attend
State benefits	Quick, direct income	Cost to taxpayers; may weaken work incentives
Progressive taxation	Funds spending; narrows after-tax gaps	May reduce effort; avoidance; cost of collection
National minimum wage	Raises pay of low earners	May cut jobs if set above the market wage

Minimum wage reminder. Market wage 5, demand = supply = 900. Minimum set at 7: demand 700, supply 1,100. Unemployed = 1,100 - 700 = 400. Jobs lost = 900 - 700 = 200. Pay bill rises from 900 x 5 = 4,500 to 700 x 7 = 4,900, but some workers lose out.

Quick self-test

1. Define real GDP per head.
2. GDP is 600 billion and the population 12 million. Calculate GDP per head.
3. Nominal GDP is 330 and the price index 125. Calculate real GDP.
4. Nominal GDP is 242 and real GDP 200. Calculate the price index.
5. Real GDP rises from 100 to 102.5 and population from 40 million to 41 million. Calculate the change in real GDP per head.
6. Name the three dimensions of the HDI.
7. The richest 20% receive 50% of income; the poorest 20% receive 5%. By how many times is the richer group’s income larger?
8. Using the tax bands in the worked reminder, calculate tax and average rate on 22,000.
9. Median income is 18,000 and the line is 60%. Is a household on 10,900 relatively poor?
10. State two causes of poverty.
11. Explain one reason why a national minimum wage might increase unemployment.
12. Explain why income can rise but a household can still fall into relative poverty.

Answers

1. Real GDP divided by population, so output adjusted for inflation and shared across the number of people.
2. 600 billion / 12 million = 50,000.
3. 330 / 125 x 100 = 264.
4. 242 / 200 x 100 = 121.
5. 102.5 / 100 = 1.025 and 41 / 40 = 1.025, so per head stays the same: 0%.
6. Health, education and income.
7. 50 / 5 = 10 times.
8. Tax = 0.25 x (22,000 - 8,000) = 3,500; average rate = 3,500 / 22,000 = 15.9%.
9. Line = 10,800. 10,900 is above it, so no, but only just.
10. Any two: unemployment, low wages, illness, age (also lack of education and others).
11. If the minimum wage is above the market wage, firms demand fewer workers while more people want jobs; labour costs rise and some firms cut hours or jobs.
12. If median income rises faster, the relative poverty line rises faster than the household’s income, so it can drop below the line.

Where marks are usually lost

• Using nominal figures when the question asks for real values.
• Forgetting to divide by population when asked for “per head”.
• Describing HDI as a measure of happiness or including wealth only.
• Mixing up absolute and relative poverty, or saying relative poverty cannot occur in rich countries.
• Defining progressive tax as “rich pay more” rather than “higher proportion”.
• Giving policies as a list with no chain of reasoning.
• Evaluation that only repeats advantages: always add a limit, a cost or a time lag.
• Calculating a percentage change against the wrong base year.

Official syllabus

Cambridge IGCSE Economics 0455 syllabus for examination in 2026, version 2, published by Cambridge University Press & Assessment (Cambridge International Education): sections 5.1 and 5.2.