3.4 Economics of inequality and poverty

The question involves the World Bank's international poverty line, which is set at $2.15 (PPP) per person per day. This is a fixed threshold used to measure absolute poverty — the inability to meet basic physiological survival needs.

The household earns **$1.95perday\ast \ast ,whichis\ast \ast below\ast \ast the$2.15 threshold. Since $1.95<$2.15, the household does not have enough income to be classified as above the absolute poverty line.

Because the benchmark is a fixed dollar amount (not relative to median income), falling below it places the household in absolute poverty. Absolute poverty can, in principle, be eliminated by economic growth alone, without requiring any change in income distribution.

The correct option states the household is in absolute poverty because its income falls below the fixed international threshold. This precisely matches the definition: absolute poverty is determined by a fixed PPP-adjusted income line, not by comparison to others in society.

The question asks how to classify a household earning $1.95/dayagainsttheWorldBan{k}^{\prime }s$2.15/day poverty line. We need to distinguish absolute poverty from relative poverty and apply the correct threshold.

The first option claims the household is in relative poverty only and implies its income exceeds half the national median. However, relative poverty requires knowing the median income of that specific country — the question provides no median figure — and more importantly, falling below $2.15/day is a criterion for absolute, not relative, poverty. Eliminated.

The third option claims classification requires median income data. This is incorrect: absolute poverty classification requires only comparison to the fixed $2.15 line, which is available. Median income is relevant only for relative poverty. Eliminated.

The fourth option claims $1.95/day is sufficient for basic needs in low-income countries. This contradicts the internationally agreed definition — the World Bank's threshold is explicitly set to reflect minimum survival needs adjusted for purchasing power parity. Eliminated.

The remaining option — that the household is in absolute poverty because its income falls below the fixed international threshold — is correct. $1.95<$2.15, placing the household below the World Bank's absolute poverty line.

Absolute poverty is measured against the World Bank's fixed threshold of $2.15/day(roughly$785/year). Relative poverty is typically measured as income below 50% of median income, which here is 50% × $50,000=\ast \ast$25,000/year**.

The household earns $22,000/year,whichisfarabovetheabsolutepovertythresholdofapproximately$785/year. The question also confirms the household can afford basic needs. Therefore, the household is not in absolute poverty.

The relative poverty line is $25,000/year.Since$22,000 < $25,000, the household falls below the relative poverty line. Even though it meets basic survival needs, its income lags behind the typical living standard in Country X.

The household is in relative poverty only — it earns below 50% of median income ($25,000) but well above any absolute poverty threshold. This illustrates why relative poverty is fundamentally a measure of inequality rather than physical deprivation.

The question tests whether students can correctly apply both absolute and relative poverty definitions simultaneously. The household earns $22,000againstamedianof$50,000 and can afford basic needs.

The first option states the household is in absolute poverty because income is below the median. However, absolute poverty is not measured against the median — it uses a fixed survival threshold (approximately $785/yearat$2.15/day). $22,000 is far above this. Eliminated.

The second option claims the household is in neither type. While it correctly escapes absolute poverty, the relative poverty line is 50% × $50,000=$25,000. Since $22,000<$25,000, the household is in relative poverty. This option is incorrect. Eliminated.

The fourth option claims the household is in both types. The household can afford basic needs and earns $22,000/year — far above the absolute poverty threshold. It is not in absolute poverty. Eliminated.

Only the third option is consistent: relative poverty only. The household earns below $25,000 (50% of median), placing it in relative poverty, but it is well above any absolute poverty threshold. This is the correct classification.