Cambridge O Level Economics: Poverty (2281)

This guide teaches 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, so everything here is for every candidate. Every country, firm and figure below is invented and illustrative. Next, use the revision notes and the practice questions. Other links: the Cambridge O Level Economics hub, the printable checklist, the free diagnostics, and the wages and earnings guide, which helps with the low-wage material.

What this unit covers

Section	What you must be able to do
5.2.1	Explain the difference between absolute and relative poverty
5.2.2	Explain why households become poor, including through joblessness, low pay, sickness and age
5.2.3	Explain policies to alleviate poverty and redistribute income, including policies that promote economic growth, improved education, more generous state benefits, progressive taxation and a national minimum wage

The syllabus asks for the difference between the two kinds of poverty, causes that include the four named ones, and policies that include the five named ones. “Including” means other causes and policies earn credit too, but the named ones are the safe core. The examination assesses knowledge, analysis and evaluation, so for every cause and policy learn a definition, a chain of reasoning and a limitation.

5.2.1 Absolute and relative poverty

Absolute poverty means a person or household lacks the income to buy the minimum needed to live: food, clean water, shelter and clothing. It is measured against a fixed standard: a poverty line set at the cost of a basic basket of goods. The line changes only when the cost of the basket changes.

Relative poverty means a person or household falls well below the typical income of the society they live in. It is measured against the average. A common rule is a poverty line set at a fraction of median income. The line moves whenever typical incomes move.

The median is the middle value when incomes are ranked. It is used because a few very high incomes pull the mean upwards.

Worked example: one survey, two lines. Ten households in Country Q (illustrative) have these incomes per person per month: 40, 65, 80, 95, 120, 150, 180, 220, 300 and 500.

• The basic basket costs 90 per person per month, so the absolute line is 90.
• The median is the mean of the fifth and sixth values: (120 + 150) / 2 = 135.
• The relative line is set at 75% of the median: 0.75 x 135 = 101.25.

Test	Line	Households below it	Share of households
Absolute	90	40, 65, 80	3 of 10 = 30%
Relative	101.25	40, 65, 80, 95	4 of 10 = 40%

The household on 95 is not in absolute poverty but is in relative poverty.

What happens if every income rises by 20%? Incomes become 48, 78, 96, 114, 144, 180, 216, 264, 360 and 600. The median becomes 1.2 x 135 = 162, so the relative line becomes 0.75 x 162 = 121.5.

Test	Line	Households below it
Absolute	90 (unchanged)	48 and 78: 2 of 10 = 20%
Relative	121.5	48, 78, 96, 114: 4 of 10 = 40%

Absolute poverty fell from 30% to 20%. Relative poverty did not change, because every income, and so the line, rose by the same proportion. This is the key idea: growth that lifts everyone equally cuts absolute poverty but leaves relative poverty unchanged. If prices of necessities rose 20%, the basket would cost 108 and the absolute line would rise too.

Which is more useful? Absolute poverty shows who is going without necessities and is the main concern where incomes are low. Relative poverty shows exclusion from the normal life of the society and is the main concern where most people can afford necessities. Neither is “worse”. Both need a judgement about where the line is drawn, and income alone may miss poor housing or poor health.

5.2.2 Causes of poverty

Build each cause as a chain: event, effect on household income, effect on what the household can afford. Compare income per person with the poverty line.

Worked example. In Country Q a household of four has the absolute line of 90 per person, so the household line is 4 x 90 = 360 a month. A working adult earns 420 a month: 420 / 4 = 105 per person, above the line.

Event	Household income	Per person	Position
Unemployment, benefit of 200 a month	200	200 / 4 = 50	Below 90
Illness: earnings fall 30% and treatment costs 60	420 x 0.7 - 60 = 234	234 / 4 = 58.5	Below 90
Low wage: 2.0 an hour, 30 hours a week, 4.3 weeks	2.0 x 30 x 4.3 = 258	258 / 4 = 64.5	Below 90
Old age: a couple on a pension of 150	150	150 / 2 = 75	Below 90

• Unemployment. No wage, so income falls to benefits, if there are any. Long spells cut skills and confidence, which makes finding work harder. Structural unemployment, where a skill is no longer in demand, can last longest.
• Low wages. Workers with few skills have low productivity, so employers will pay little. Weak bargaining power, part-time hours and insecure work keep pay down. A full-time worker can still be poor if there are dependants.
• Illness. Treatment costs money, and sickness lowers working hours and earnings. A sick child can lose schooling, so the effect lasts a generation.
• Age. Elderly people may rely on a small pension or on savings that inflation erodes. Children cannot earn, so large families with young dependants spread income thinly.

You may add other causes: little education, discrimination, living far from jobs, conflict, and owning no land or capital. Poverty also reinforces itself. A poor family cannot afford schooling, so the children earn little as adults. Say this cycle explicitly when asked to analyse.

5.2.3 Policies for alleviating poverty and redistributing income

Redistribution means moving income from richer to poorer households, usually through taxes and benefits. For each policy give the mechanism, then who gains, who pays, how fast it works, and a limitation.

Economic growth

Growth raises output, creates jobs and raises incomes. It also raises tax revenue, which can pay for services. Check population: if real GDP rises 4.5% and population rises 1.5%, real GDP per head rises 1.045 / 1.015 - 1 = 2.96%. Population is included because the output is shared among more people.

Evaluation: the benefits may go mostly to the rich. In Country Q’s survey the richest tenth gets 500 of 1,750 in total. If the poorest household’s income rises only 2% (40 to 40.8) while the median rises 20%, its relative position worsens. Growth is slow and may harm the environment. Growth that is labour-intensive tends to help the poor most.

Improved education

Education raises skills and so productivity and wages, and lowers unemployment. Suppose a training course costs 1,800 and raises earnings by 60 a month. Annual gain = 60 x 12 = 720. Payback = 1,800 / 720 = 2.5 years.

Evaluation: the bill falls on the state or family now while the gains arrive years later, and the poorest may keep children out of class because their earnings are needed or fees, books and transport cost too much. Skills must match the jobs on offer.

More generous state benefits

Cash transfers (unemployment, sickness, disability and old-age support) raise the income of poor households directly and fast. This is the most direct anti-poverty tool.

Evaluation: it costs taxpayers and may require higher tax or borrowing. It can reduce the incentive to work if benefits are withdrawn as earnings rise. Example: if a worker earns 100 more and loses 60 of benefit, only 40 is kept, a withdrawal rate of 60 / 100 = 60%. Benefits treat symptoms, not causes, and need accurate targeting.

Progressive taxation

A progressive tax is one where the percentage of income paid grows as income grows. Illustrative monthly bands in Country Q: 0% on the first 200; 15% on income from 200 to 600; 35% on income above 600.

Income	Tax	Average rate	After tax
180	0	0%	180
400	0.15 x 200 = 30	30 / 400 = 7.5%	370
900	0.15 x 400 + 0.35 x 300 = 165	165 / 900 = 18.3%	735
2,400	0.15 x 400 + 0.35 x 1,800 = 690	690 / 2,400 = 28.75%	1,710

The richest-to-poorest gap narrows from 2,400 / 180 = 13.3 times before tax to 1,710 / 180 = 9.5 times after tax. The revenue from the 900 and 2,400 incomes (855 together) can fund benefits and services.

Evaluation: high marginal rates may reduce effort, encourage tax avoidance or push high earners abroad. The effect depends on how the revenue is used.

National minimum wage

A legal floor under hourly pay. Illustrative market for unskilled workers in Country Q: the equilibrium wage is 2.0 an hour, where 400 workers are demanded and 400 supplied. At each 1.0 rise in the wage, demand falls by 100 and supply rises by 100.

Hourly wage	Demand for workers	Supply of workers	Result
2.0	400	400	Equilibrium
3.0	300	500	200 more workers want jobs than are available

A minimum of 3.0 gives a 50% wage rise, and 300 keep jobs: each gains 1.0 an hour, 300 an hour in total. Employment falls 25% (400 to 300), so the response of labour demand is 25 / 50 = 0.5, inelastic. The wage bill rises from 2.0 x 400 = 800 to 3.0 x 300 = 900. A worker on 3.0 earning 3.0 x 30 x 4.3 = 387 a month supports four people at 96.75 each, above the line of 90.

Evaluation: the more elastic labour demand is, the larger the job loss. A minimum set near the market wage does little harm and little good. Employers may raise prices, cut hours or hire fewer workers, and in a country with many informal workers it may not be enforced.

Evaluating policies together

Policy	Speed	Cost to government	Main risk
Growth	Slow	Low direct cost	Gains go to the rich
Education	Very slow	High	Skills mismatch
Benefits	Fast	High	Work incentives
Progressive tax	Fast	Raises revenue	Avoidance, effort
Minimum wage	Fast	Low	Job losses

A good answer chooses: for urgent absolute poverty, benefits; for long-run escape, education and growth. Say who is poor (old, sick, unemployed or low paid) because the right policy depends on the cause.

Common errors

• Defining relative poverty as “being poor compared with other countries”. It is compared with others in the same society.
• Saying growth always cuts relative poverty. Equal growth leaves it unchanged.
• Defining a progressive tax as “the rich pay more”. They pay a larger share.
• Stating a policy without a limitation, or a limitation without saying why it matters.
• Assuming the minimum wage always causes unemployment. It depends on elasticity.

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.