POVERTY AND STANDARDS OF LIVING KNEC NOTES

Poverty can be defined in two ways:

  • Absolute terms
  • Relative terms

Absolute terms – we define poverty by picking a certain period income level (10,000 p.m) and say that any family or individual whose income falls below this level is said to be living in poverty.

Relative terms – we define poverty by ranking individual income earners and say that any family or individual that fall in the bottom 10% of the income earners per the rank is said to be living in poverty.

Generally poverty can be defined as inability to acquire the basic needs in one’s life. 

Standards of living

  • People require basic needs in their lives (shelter, clothing and food) and other support- needs (education, health care e.t.c.).The extent to which an individual is able to obtain these needs will determine his/her standards of living. With improved income distribution among individuals they will be able to access better housing facilities, education and welfare services as well as clothing and feeding habits. Low standards of living are closely associated with poverty and therefore attempts to eliminate poverty would raise the living standards of people.

Poverty line

Is the dividing line between those considered poor and those not officially considered to be poor.

The line identifies the income below which people are considered to be living in poverty and therefore individuals or families with income below the line are considered to be poor.

Causes of poverty

The causes can be attributed to the various factors that lead to unequal distribution of income i.e. between various groups of people or individual or regions in an economy.

  1. Unequal regional distribution of natural resources

The imbalance of regional natural resources endowment implies that people who have access to the natural resources will acquire more income than those who have no access at all.

  1. Difference in skill endowment

Since skills depend on the level of education the higher the level of education the higher the skills and vice versa. Skilled people (doctors, engineers) earn higher income than unskilled causing income inequality that may lead to poverty.

  1. Personal income distribution

It refers to the pattern of income distribution according to the relative size of the people income.

The comparative analysis is best shown by Lawrence curve as shown below:

The bottom axis (x) shows households divided into five equal groups according to the income received. The vertical axis (y) shows the percentage of total income earned by each group.

Perfect equality distribution of income would be represented by diagonal straight line from low left corner to right left corner. The extent to which the actual distribution shown varies from the diagonal straight line indicates the extent of inequality of income distribution. The more the curve bows away from a straight line the greater the inequality of income thus leading to poverty.

  1. Level of Wealth

Incomes also tend to vary because some people in a country or in an economy may own more wealth than others, which has an impact on their ability to earn income. Those who do not own wealth may be considered poor because of their limited ability to own wealth.

  1. Discrimination

It influences the distribution of income and occurs on the basis of gender and ethnicity.

For example, women may not be promoted to executive positions in certain companies or organizations because men believe that they cannot handle those positions. Certain unions also deny immigrants/ethnic minority members on the grounds that certain ethnic groups do not belong to certain professions.

  1. Ability/talents

Some people earn more income because they have certain natural abilities that when exploited would enhance their potential to acquire certain level of income.

  1. Monopoly power

The degree of monopoly power held by certain groups would also determine the difference in the distribution of income e.g. trade unions have considerable power and they have been able to obtain high wages and better working conditions.

 

Other factors are:-

  1. Unequal access to finance e.g. loans or grants
  2. Differences in employment in some jobs are more paying than others.

Age difference

  1. Effects of inflation
  2. Political favoritism
  3. Unequal distribution of socio-economic infrastructure such as schools, hospitals, factories.

 

National Income

Is the measure of the total money value of all goods and services arising from the productive activities of a nation in any country in a given period usually one year.

N/B: National income is measured in monetary terms, however the interest is in the value of the commodities produced and the money itself.

Description of National income figures

When measuring national income, it can be expressed in the following ways:

  1. The G.D.P (Gross Domestic Product)

The total monetary (money value) of all the final goods and services produced within a territorial boundary of a country by both the nationals and non-nationals over a given period of time usually one accounting year. 

  1. The G.N.P.(Gross National Product)

Is the measure of the money value of all goods and services produced by all the nationals/citizens (both within and abroad) during a given period of time usually one year.

N/B: It excludes the value of output by non-nationals within the country.

G.N.P= G.D.P +Income

Thus we can compute G.N.P from G.D.P as:-

G.N.P= G.D.P + Income earned by nationals abroad – income earned by national within the country.

  1. The NNP (Net National Product)

Is the measure of the Net Monetary value of goods and services produced by the nationals of a country after removing amount or value needed to replace the assets worn out in processing or producing the output in a given period of time usually one year.

It is derived from GNP as:-

GNP; NNP= GNP – Capital allowance (capital depreciation)

  1. Net Domestic Product (NDP)

Is the actual monetary value of goods and services produced within a country by both nationals and non-nationals in a given period of time after removing the amount (value) needed to replace parts of the capital assets warn out during the production process.

NDP is obtained by deducting from GDP the capital depreciation. It can be computed as:-

NDP= GDP- Capital Allowance

  1. National income (NI)

Is computed by subtracting all indirect business taxes except the co-operate profit tax from the Net National Product.

NI= NNP- All indirect business taxes except cooperative taxes plus social security contributions.

Examples of Indirect taxes

Excise tax

Sales tax

Import duty

Property tax

Personal Income (PI)

Is the total amount of income that goes to consumers before individual taxes are subtracted. To move from NI to PI four major adjustments must be made.

  1. Income that does not go to the consumers must be subtracted from national income e.g. retained earnings (undistributed cooperate profits)
  2. Income taxes paid by cooperative to the Government must also be deducted from national income.
  3. Social security contributions must also be subtracted from national income e.g.NHIF, NSSF etc.
  4. You add all government transfer payments.

Disposable Personal income (DPI)

Refers to the total amount of income that the consumer- sector has at its disposal after the individual taxes (PAYE) has been deducted.

PI = PI – personal income taxes (PAYE)

Methods of measuring National Income

There are three methods/approaches used to measure national income.

1. Output/product approach

In this method national income is measured by taking the summation of all the total monetary contributions made by various sectors. To avoid double counting only the ‘value added’ by each sector/business enterprise at each successful stage of production should be included and thus considers values of only the final products. This method presents NI as the total output from domestically owned resources during the cause of the year. It is commonly used and gives the GDP of the country.

2. Expenditure approach

It means the total expenditure incurred on final goods and services produced by firms and individuals during the course of the year and is given as:

NI = C+I+G+XM)

Where: C – consumption Expenditure

I – Investment expenditure

NI – National income exp

G – Government expenditure

X – Expenditure by national s from exports

M – Expenditure by national from imports

It gives the NI at the market price.

 3. Income method/approach

In this method, national income is measured as a summation of total factor income payments in the causing of producing the output while excluding the transfer of payment.

It is expressed as;

NI = W+I+R II

WHERE: W – Wages on labour

I – Interest on capital assets

R – Rent on land

II – Profit paid to entrepreneur

It presents national income in terms of income earned by factors of production engaged in producing the output.

It gives national income at factor cause.

Determinants of the size of a country’s national income

  1. Availability and exploitation of national resources. The size of natural resource availability and the level of its exploitation determine the size of a country’s national income. If these resources which include all gifts of nature are largely available and highly exploited then the size of national income will be big and vice versa.
  2. Size of the capital stock

If the size of the country’s stock such as factories, machines or equipment, private and social capital used to produce other assets is large, then the size of national income rises through massive/extensive production and vice versa.

  1. Level of technological advancement of a country

Advanced technology leads to higher growth of national income through massive production and vice versa.

  1. The level of human resource availability

A large number of high quality or skilled working population leads to a bigger size of income, than where the quality and the size of labour force are low.

  1. The investment level

If the level of both domestic and foreign investment is high then the size of national income will be big and vice versa.

  1. Government will and incentives (attractive policy)

If the government or political will is positive with regard to resources utilization and where the private sector is strong then the size of national income will be bigger and vice versa.

  1. Political stability

Conducive political atmosphere makes it possible for investment and production to take place in a country leading to growth in the size of national income and vice versa.

  1. The level of market size

A country that has larger domestic and external market will have a big size of national income and vice versa.

  1. The level of industrialization

Where the level of industrialization is high and the TOT is favourable, the size of national income will be increased and vice versa.

  1. The population growth rate
  2. The culture and attitude of people
  3. Entrepreneurial abilities

 

General problems of measuring national income in LDCs especially by GDP

The problems faced when measuring national income in LDCs are either conceptual or statistical. Conceptual problems are those that are related to the subject matter of national income and relate the determination of items for inclusion in the national income figures. Statistical problems on the other hand are those that are faced during the process of data collection

The problems generally include the following:-

  1. Boundary of production; it is difficult to determine which goods or activities should be included or excluded from the national income statements e.g. prostitution, gambling etc.
  2. Double counting; this problem arises from the failure to distinguish between final and intermediate products. Some items can be included in the estimates more than once.
  3. Inadequate statistical information; there is always inadequate information because few entrepreneurs and consumers keep accurate information about what they produce or consume.
  4. Price changes; the always prevalent price changes affect the value of national income such that when the general price level in the economy rises, the national income shows an increase even though the real production of goods and services may have fallen and vice versa. It is very difficult to adjust the effects of inflation.
  5. Omitted market transactions; in the economy, not all transactions which take place are included in the national income. Only those that result from productive economic activities are relevant when compiling NY. Those which are unproductive are excluded e.g. transfer payments, capital gains etc. making adjustments for such exclusion is also a problem when compiling national income.
  6. Determination of income from abroad; it is difficult to determine the net income from abroad since import and export trade are carried out by many people or groups of people with little data available to verify the amount imported and exported by private individuals. There is also additional problem of non – disclosure.
  7. Inadequate skilled manpower; in LDCs there is lack of sufficient skilled manpower to do the exercise. There is a shortage of qualified and experienced personal to collect data effectively.
  8. Determination of depreciation allowances; it is difficult to measure so as to determine the net income because firms use different methods to measure depreciation which makes national income to exact but an estimate.
  9. Timing of production; it is difficult to determine the output produced in a country during the year e.g. crops may stay in the field for more than one year and there is likelihood that they may be counted when they were produced.
  10. Inadequate facilities; facilities like computers to collect and analyze data are not sufficiently employed.
  11. Subsistence production; this problem arises because there are some goods and services which people prefer to provide for themselves. It is difficult to get the value of such output which is not offered to the market.

 

Per capita income as an index for standard of living

Per capita income refers to average income per individual in a country at a given period of time. It is given dividing the country’s total income by its total population i.e.

Per capita income = Total National Income

Total population

Short comings of per capita income as an index of standard of living

  1. It ignores the distribution of goods and services which is other wise very essential in determining the individuals’ welfare. Per capita income does not give any information on how the goods and services are produced are distributed in the country.
  2. It ignores the composition and quality of goods and services. The per capita income may be high yet the country produces mainly capital goods and weapons which do not contribute to the people’s welfare directly. In this case the per capital income will be high but the standard of living will be low and vice versa.
  3. Inaccurate national income and population figures are always lead to false index. Population figures in LCDs are always inaccurate because of political factors and ignorance of the local people about population census aims.
  4. It ignores the contribution of the subsistence sector. National income figures exclude subsistence production yet this is very essential component of the general welfare of an individual. Thus the per capita income could be low but people could still enjoy a satisfactory level of welfare.
  5. Changes n the general price level over time also renders per capita income a weak index of standard of living.
  6. It ignores the effects of climate factors. Climate affects the general welfare of the people yet per capita income does not take this into consideration.
  7. It ignores the effects of foreign investments. The income generated may be of a foreign investor which does not improve the material well being of the local people.
  8. It does not reflect the quality of life e.g. life in a crowded city is full of tension: roads are overcrowded, there is loss of time, accidents occur daily which kill or cripple people’ environment becomes polluted, there are problems of water, power, housing, transportation etc. crimes spread, life becomes complex and the quality of life deteriorates. Consequently social welfare reduces which is not reflected in per capita income.

Measures/Remedies used to overcome income inequalities

Positive remedies for income inequalities

  • Progressive taxation policy so that the rich are taxed heavily to reduce their income e.g. P.A.Y.E.
  • Increased expenditure on social services that benefit the poor.
  • Rural development policies to increase the earning powers and opportunity of the rural poor and reduce rural urban migration e.g. the decentralization policy to bring services nearer to the people.
  • Minimum wage legislation to reduce on the earning disparities of the workers.
  • Balanced regional allocation of economic infrastructure to balance the employment opportunities in all regions.
  • Land reform measures to give land to the landless for agricultural production.
  • Strong anti-trust and inheritance laws with high taxation to minimize gains from such.
  • Special programs for the disadvantaged groups like women, disabled e.t.c. to give them equal opportunities e.g. affirmative actions.
  • Promotion of indigenous technologies to provide employment opportunities e.g. in the informal sector.
  • Education reform measures to produce job makers and not job seekers.
  • Improvement in general infrastructure e.g. road construction to facilitate income generating activities.
  • Liberalization of the economy to promote self help projects.
  • Agricultural modernization to boost the income.
  • Provision of rural and general credit schemes for the low income earners.
  • Subsidization policy i.e. giving subsidies to low income earners and tax relief.
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