Two countries have the same average income. In one, almost everyone earns close to that average. In the other, a tenth of the population holds most of it and the rest live near subsistence. The statistic is identical and the societies are nothing alike. Averages describe the size of the cake and say nothing about how it is cut, which is why distribution is a separate question from growth and needs its own tools.
Living standards describe the material and non-material wellbeing of a population. The material side covers income, housing, food, healthcare and access to goods and services. The non-material side covers life expectancy, education, safety, leisure, political freedom and environmental quality. Real GDP per capita is the usual proxy for the first and a poor proxy for the second, which is why measures such as the Human Development Index combine income with life expectancy and educational attainment.
Absolute poverty
A situation in which a person's income is insufficient to afford the basic necessities of life, such as food, clean water, shelter, clothing and healthcare.
Relative poverty is different and the distinction is examined constantly. It describes having substantially less than the typical standard in your own society, commonly defined as an income below some fraction of the median, and it is a statement about inequality rather than about survival. The consequences follow: economic growth can eliminate absolute poverty entirely, because everyone's income rises above the subsistence threshold, while leaving relative poverty untouched or worsening it if the gains go mainly to those already at the top.
The commonest error is treating the two kinds of poverty as degrees of the same thing. They are measured against different benchmarks: absolute poverty against a fixed basket of necessities, relative poverty against the current median in that country. It follows that relative poverty can exist in a rich country and that a country can reduce absolute poverty while relative poverty rises. Saying that explicitly earns marks.
Poverty has identifiable causes and questions expect several. Unemployment removes earned income altogether. Low wages, part-time and insecure work leave people poor despite working. Lack of education and skills restricts access to better-paid jobs and passes disadvantage between generations. Illness or disability limits earning capacity while raising costs. Age matters, since children and the elderly depend on others or on the state. And the absence of a welfare system, or one too small to matter, leaves people with nothing to fall back on when any of these occur.
Governments reduce poverty and inequality through several routes. Progressive taxation takes a larger share from higher incomes. Transfer payments such as unemployment benefit, pensions and child support redistribute directly. Free or subsidised provision of education and healthcare gives access to services that would otherwise be unaffordable, and raises long-term earning capacity. A national minimum wage raises the pay floor. Policies to reduce unemployment, and to widen access to training, tackle the causes rather than the symptoms. Each has costs, and questions almost always want the trade-off as well as the measure.
Testing whether a tax system is progressive
In a country, a worker earning $20,000 pays $2,000 in total tax, while one earning $80,000 pays $20,000. A third earning $200,000 pays $44,000. Calculate the average tax rate for each and classify the system across the whole range.
A country's economy grows and every household's real income doubles. What happens to poverty?
Which measure tackles a cause of poverty rather than relieving its symptoms?