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Economic Problems: Poverty, Inequality, Unemployment

A theory that scarcity exists in the sense that only finite and insufficient resources are available to satisfy the needs and desires of all human beings. The fundamental economic problem then faced by human society and business operators is how to allocate scarce resources to the provision of various goods and services within the economy.

All societies face the economic problem, which is the problem of how to make the best use of limited, or scarce, resources. The economic problem exists because, although the needs and wants of people are endless, the resources available to satisfy needs and wants are limited.


Poverty is often defined by economists and social workers with reference to certain basic amenities such as food, floor space per person, medical care, etc. When a family lacks these ba­sic amenities, it is considered poor, regardless of its income.

An alternative approach is to define poverty “in terms of both minimum needs of food con­sumption”, or, more specifically, calorie or nutri­tion requirements to sustain life are determined first. This is then converted into an income level for a particular base year. Families with income less than the “critical level” are classified as poor re­gardless of size and actual living conditions as a result of past savings, accumulated wealth and private gifts.

A third approach is to define poverty in terms of relative income, irrespective of accumulated wealth. The lowest 5% or 10% of the population is defined as poor. This is known as income pov­erty.


Poverty is of two types absolute and rela­tive. Absolute poverty is measured by the percent­age of people living below the poverty line or by the head count ratio. Relative poverty refers to income inequality.

In measuring poverty the first step is to set a standard and then estimate the number of persons who satisfy the standard in different regions of the country and at different points of time. However, specification of that standard has to be arbitrary, reflecting a social value judgment.

The poverty line is updated by estimating what would it cost to obtain the base year con­sumption basket with prices prevailing in subse­quent years. The process has one major drawback; it does not take into account the substitution that consumers may make when the relative prices of some items of consumption change or their tastes change.

Causes of Mass Poverty

Now, we will mention some factors which are operating in India to cause mass poverty de­spite planned efforts to reduce such poverty.

In the first place, ownership of industries in the hands of a few small businessmen in India has made the distribution of income inequitable. And poverty is a reflection of inequality. These people have accumulated huge profit and, hence, wealth.

Secondly, in the initial stage of planning, planners placed a great deal of emphasis on growth objective as growth itself would take care of in­equality or poverty. The Fifth Plan stated that a higher rate of growth of national income would itself enlarge employment opportunities and, hence, standards of living of poor masses.

But this did not happen. In a society characterised by gross inequality in the distribution of assets, economic growth itself failed to reduce poverty. Thus, the problem of poverty in India lies in the economic structure—”skewed distribution of the ownership of income-yielding assets.”

The same trend is observed in rural area where we find inequitable distribution of land, which is most important income-earnings asset.

Thirdly, the most important cause of inequal­ity and, hence, poverty, is the chronic unemploy­ment and underemployment situation. This defi­nitely has the potentiality of reducing output and, hence, income. This means that the low rate of economic growth is the cause of the low level of income of the vast majority of the people. Despite several measures to reduce unemployment, the problem in recent times has assumed a gigantic proportion, making the problem of poverty more acute as well as painful.

Fourthly, regressive tax structure of the coun­try leading to tax evasion is another influencing factor in increasing inequality and poverty. Tax evasion has led to the growth of black money in a reckless speed. This black income is owned by the high income group people. This regressive tax structure is contributing greatly to fuel the infla­tionary fire. Inflation tends to widen economic in­equality.

Fifthly, high rate of population growth in In­dia has also made the problem of poverty a seri­ous one. Because of illiteracy, population growth among the poor masses is high. Above all, as they consider male child an asset, they enlarge the size of their families. Obviously, with little employ­ment and bigger families, incomes per head of the family are inadequate even to meet the basic needs. This is one aspect of the “vicious circle of poverty.”

Finally, considering the extent of poverty, the anti-poverty measures adopted by the Govern­ment are grossly inadequate. As a result, a large number of people still live below the poverty line.


Economic inequalities are most obviously shown by people’s different positions within the economic distribution – income, pay, wealth. However, people’s economic positions are also related to other characteristics, such as whether or not they have a disability, their ethnic background, or whether they are a man or a woman. While The Equality Trust recognises the importance of these measures, the focus of our work is specifically the gap between the well-off and the less well-off in the overall economic distribution. This is reflected in the choice of terms and statistics in this section.

There are three main types of economic inequality:

(i) Income Inequality

Income inequality is the extent to which income is distributed unevenly in a group of people.

Income is not just the money received through pay, but all the money received from employment (wages, salaries, bonuses etc.), investments, such as interest on savings accounts and dividends from shares of stock, savings, state benefits, pensions (state, personal, company) and rent.

Measurement of income can be on an individual or household basis – the incomes of all the people sharing a particular household. Household income before tax that includes money received from the social security system is known as gross income. Household income including all taxes and benefits is known as net income.

(ii) Pay Inequality

A person’s pay is different to their income. Pay refers to payment from employment only. This can be on an hourly, monthly or annual basis, is typically paid weekly or monthly and may also include bonuses. Pay inequality therefore describes the difference between people’s pay and this may be within one company or across all pay received in the UK.

(iii) Wealth Inequality

Wealth refers to the total amount of assets of an individual or household. This may include financial assets, such as bonds and stocks, property and private pension rights. Wealth inequality therefore refers to the unequal distribution of assets in a group of people.


The unemployment rate is a measure of the prevalence of unemployment and it is calculated as a percentage by dividing the number of unemployed individuals by all individuals currently in the labor force. During periods of recession, an economy usually experiences a relatively high unemployment rate. millions of people globally or 6% of the world’s workforce were without a job in 2012.

The causes of unemployment are heavily debated. Classical economics, new classical economics, and the Austrian School of economics argued that market mechanisms are reliable means of resolving unemployment. These theories argue against interventions imposed on the labor market from the outside, such as unionization, bureaucratic work rules, minimum wage laws, taxes, and other regulations that they claim discourage the hiring of workers. Keynesian economics emphasizes the cyclical nature of unemployment and recommends government interventions in the economy that it claims will reduce unemployment during recessions. This theory focuses on recurrent shocks that suddenly reduce aggregate demand for goods and services and thus reduce demand for workers. Keynesian models recommend government interventions designed to increase demand for workers; these can include financial stimuli, publicly funded job creation, and expansionist monetary policies.

Its namesake economist John Maynard Keynes, believed that the root cause of unemployment is the desire of investors to receive more money rather than produce more products, which is not possible without public bodies producing new money. A third group of theories emphasize the need for a stable supply of capital and investment to maintain full employment. On this view, government should guarantee full employment through fiscal policy, monetary policy and trade policy as stated, for example, in the US Employment Act of 1946, by counteracting private sector or trade investment volatility, and reducing inequality.


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