Poverty Cycle – Low-Income TrapSL
Global EconomicsThis diagram illustrates the poverty (development) cycle: a self-perpetuating loop where low income leads to low savings, low investment, low capital accumulation, low productivity, and therefore low growth in income, keeping households or countries trapped in poverty.
Curves and elements
- low income
- Low Income: Starting point of the cycle, limiting households’ capacity to save.
- low savings
- Low Savings: Insufficient funds available for investment.
- low investment
- Low Investment: Few resources devotedtto capital formation.
- low capital
- Low Physical/Natural/Human Capital: Constrains productive capacity.
- low productivity
- Low Productivity: Output per worker remains low.
- low growth income
- Low Growth in Income: Incomes barely rise, feeding back into low income.
Key explanations
- 1
Low Income reduces households’ ability to save.
- 2
Low Savings limit funds available for productive investment.
- 3
Low Investment results in low physical, human, and natural capital formation.
- 4
Low Capital leads to Low Productivity of labour and resources.
- 5
Low Productivity constrains Growth in Income, feeding back into Low Income and continuing the cycle.
Example exam question
Using the poverty-cycle diagram, explain why some developing countries remain trapped in poverty and suggest two policy measures that could break the cycle.
Show example answer
The poverty cycle shows that low income restricts savings, which curtails investment in capital and human development, leading to low productivity and minimal income growth. To break the cycle, governments could introduce conditional cash-transfer programmes to raise incomes and savings, and invest in education and healthcare to boost human capital and productivity, allowing incomes to rise sustainably.
