Cambridge O Level Economics: Poverty (2281) – Revision Notes

These notes condense section 5.2 (Poverty, 5.2.1 to 5.2.3) of the Cambridge O Level Economics (2281) syllabus for examination in 2026, version 2. The course is not tiered. For full explanations read the study guide, then test yourself with the practice questions. Other links: the Cambridge O Level Economics hub, the printable checklist, the free diagnostics and the wages and earnings notes. All countries and figures are invented and illustrative.

5.2.1 Definitions

Term	Meaning	How it is measured	Moves when
Absolute poverty	Cannot afford basic necessities: food, clean water, shelter, clothing	A fixed line: the cost of a basic basket	The cost of the basket changes
Relative poverty	Much less income than most people in the same society	A line set as a fraction of median income	Typical incomes change

Memory hook: absolute means a fixed standard of living, relative means compared with neighbours.

Method in steps: counting the poor

1. Rank the incomes per person from lowest to highest.
2. Find the median: the middle value, or the mean of the two middle values.
3. Work out the relative line: the stated fraction x median.
4. The absolute line is given (the basket cost).
5. Count the incomes below each line and divide by the total number.

Worked reminder. Country R (illustrative), eight households, income per person per month: 30, 55, 70, 85, 110, 140, 200, 360.

• Median = (85 + 110) / 2 = 97.5.
• Relative line at 80% of median = 0.8 x 97.5 = 78.
• Absolute line (basket) = 60.

Test	Households below	Share
Absolute (60)	30, 55	2 of 8 = 25%
Relative (78)	30, 55, 70	3 of 8 = 37.5%

If every income rises 25%, the median becomes 121.875 and the relative line 97.5. Below the absolute line: only 37.5, so 1 of 8 = 12.5%. Below the relative line: 37.5, 68.75 and 87.5, still 3 of 8 = 37.5%. Equal growth cuts absolute poverty and leaves relative poverty unchanged. If the basket price rose 10%, the absolute line would go from 60 to 66.

5.2.2 Causes of poverty

Cause	Chain of reasoning	Group most affected
Unemployment	No wage, income falls to benefit or nothing, skills fade, harder to be re-employed	Workers whose industry is declining
Low wages	Low skills mean low productivity, so low pay; weak bargaining power; part-time or insecure work	Unskilled workers, workers with dependants
Illness	Treatment costs, fewer hours worked, lost schooling for children	Poor households with no sickness cover
Age	Small pension, savings eroded by rising prices, no earnings; children are dependants	Elderly people, large families

Other causes to add when asked for more: little education, discrimination, living far from jobs, conflict, lack of land or capital. The poverty cycle: low income, then poor health and schooling, then low productivity as an adult, then low income again.

Worked reminder: household line. Household of three, absolute line 60 per person, so the household line is 3 x 60 = 180. Unemployed with a benefit of 90 a month: 90 / 3 = 30 per person, far below 60. One earner on 210: 210 / 3 = 70 per person, above 60 but only by a little. Always divide household income by the number of people before comparing with the line.

5.2.3 Policies

Policy	Mechanism	Strength	Limitation
Economic growth	More output, jobs, incomes and tax revenue	Raises incomes without taking from anyone	Slow; gains may go to the rich; may harm the environment
Improved education	Skills, productivity, higher wages, less unemployment	Long-lasting; breaks the cycle	Expensive; slow payoff; the poorest may be unable to take part
More generous state benefits	Cash transfers to the unemployed, sick, old and low paid	Fast and direct	Costs taxpayers; weaker work incentive
Progressive taxation	Bigger share taken from bigger incomes; revenue pays for benefits and services	Narrows income gaps	Avoidance; lower effort at high rates
National minimum wage	Legal floor under pay	Raises low pay at no direct cost to the state	Job losses if labour demand is elastic; weak enforcement

Formula: growth per head. To find growth in output per person, divide one plus GDP growth by one plus population growth, then subtract 1. With GDP up 3.2% and population up 1.8%: 1.032 / 1.018 - 1 = 1.38%. The shortcut 3.2 - 1.8 = 1.4% is close but not exact.

Worked reminder: progressive tax. Illustrative bands: 0% on the first 150; 20% on income from 150 to 500; 40% above 500.

Income	Tax	Average rate	After tax
120	0	0%	120
350	0.2 x 200 = 40	11.4%	310
800	0.2 x 350 + 0.4 x 300 = 190	23.75%	610
1,500	0.2 x 350 + 0.4 x 1,000 = 470	31.3%	1,030

The share taken climbs as income climbs, so the tax is progressive. The 1,500 earner has 12.5 times the 120 earner before tax and 8.6 times after tax (1,030 / 120).

Worked reminder: benefit withdrawal. A worker earns 80 more and loses 52 of benefit. Keeps 80 - 52 = 28. Withdrawal rate = 52 / 80 = 65%. Evaluation: very high rates make extra work hardly worthwhile.

Elasticity link for the minimum wage. Response of employment = % change in employment / % change in wage. A wage rise of 25% with employment down 5% gives 5 / 25 = 0.2 (inelastic): the job loss is small, and the workers who stay are better off. If the figure is above 1, the pay bill of the group falls and the policy backfires for them as a group.

Must-know distinctions

• Absolute against relative: fixed basket against share of the median.
• Progressive against flat: a flat tax takes the same proportion from everyone; the rich still pay more money but not a higher percentage.
• Cause against policy: pair the policy with the cause. Benefits answer unemployment or age quickly; education answers low skills slowly.
• Redistribution against growth: redistribution moves a given income; growth enlarges it.

Model chain for an explain answer

Question type: “Explain how an ageing population could cause poverty.” Build it in links.

1. Older people leave work, so their earnings stop (cause).
2. Income falls to a pension, which may be small (effect on income).
3. Prices keep rising while the pension is fixed, so the real value of the pension falls (effect on spending power).
4. Spending on medicines and heating takes a larger share, leaving less for food (effect on living standards).
5. Income per person drops below the poverty line (conclusion).

Then add a short evaluation: the risk is lower where pensions rise with prices or where families support the elderly.

Evaluation toolkit

Use these four tests for any policy: how fast, who pays, who gains, what side effect. Finish with a judgement tied to the case, for example “for the elderly, benefits matter most because education cannot help them”.

Quick self-test

1. Define absolute poverty.
2. Incomes per person are 12, 18, 25, 31 and 60. The relative line is 50% of the median. Calculate the line.
3. Real GDP rises 5% and population 2%. Calculate the rise in real GDP per head to two decimal places.
4. A tax takes 80 from an income of 800 and 400 from an income of 2,000. Is it progressive? Explain.
5. A worker earns 50 more and loses 35 of benefit. Calculate the withdrawal rate.
6. A minimum wage lifts pay from 4 to 5 an hour and employment falls from 800 to 760. Calculate the response of employment.
7. Name four causes of poverty named in the syllabus.
8. A course costs 900 and raises earnings by 25 a month. Calculate the payback period in years.
9. A household of five has 310 a month. The absolute line is 70 per person. Is it in absolute poverty?
10. The basket cost rises 10% from 70. State the new absolute line.

Answers

1. Not having enough income to buy basic necessities such as food, water, shelter and clothing, measured against a fixed standard.
2. Median = 25; 0.5 x 25 = 12.5.
3. 1.05 / 1.02 - 1 = 2.94%.
4. Average rates are 80 / 800 = 10% and 400 / 2,000 = 20%. The rate rises with income, so yes, progressive.
5. 35 / 50 = 70%.
6. Wage +25%, employment -5%, so 5 / 25 = 0.2 (inelastic).
7. Unemployment, low wages, illness, age.
8. 25 x 12 = 300 a year; 900 / 300 = 3 years.
9. 310 / 5 = 62 per person, below 70, so yes.
10. 70 x 1.10 = 77.

Where marks are usually lost

• Writing a definition of relative poverty with no reference to the same society or to the average.
• Using household income without dividing by household size.
• Saying growth reduces poverty with no mention that the gains may be unequal.
• Calling any tax paid by the rich “progressive”.
• Listing causes as one-word bullets with no chain from the cause to a lower income.
• Giving a policy with no limitation, or a limitation with no reason.
• Forgetting that an elastic labour demand matters for the minimum wage.
• Ending an evaluation with a summary that does not choose or justify a policy.

Official syllabus

Cambridge O Level Economics 2281 syllabus for examination in 2026, version 2, published by Cambridge University Press & Assessment (Cambridge International Education): section 5.2.