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A Lecture Presentation in PowerPoint to accompany Exploring Economics by Robert L. Sexton and Peter Fortura Copyright © 2007, Nelson, a division of Thomson Canada Ltd. . Chapter 10 Input Markets and the Distribution of Income Copyright © 2007, Nelson, a division of Thomson Canada Ltd. . 10.1 Input Markets Approximately 70 percent of national income goes to wages and salaries for labour services. The rest goes to owners of land and capital and the entrepreneurs who employ those resources to produce valued goods and services. Copyright © 2007, Nelson, a division of Thomson Canada Ltd. . 10.1 Input Markets The price and quantity of each of these inputs is determined by their supply and demand. In input or factor markets, the demand for an input is a derived demand— derived from consumers’ demand for the good or service. The “price” of a productive factor is directly related to consumer demand for the final good or service. Copyright © 2007, Nelson, a division of Thomson Canada Ltd. . 10.2 Supply and Demand in the Labour Market Because firms are trying to maximize their profits, they try to make the difference between total revenue and total cost as large as possible. The attractiveness of a resource, then, varies with what the resource can add to the revenues received by the firm relative to what it adds to costs. Copyright © 2007, Nelson, a division of Thomson Canada Ltd. . 10.2 Supply and Demand in the Labour Market The demand for labour is determined by its marginal revenue product (MRP), which is the additional revenue that a firm obtains from one more unit of input. The marginal resource cost (MRC) is the amount that an extra input adds to the firm’s total costs. In a competitive labour market, its MRC is the market wage. Copyright © 2007, Nelson, a division of Thomson Canada Ltd. . 10.2 Supply and Demand in the Labour Market A firm would find its profits growing by adding one more worker when the marginal revenue product associated with the worker exceeds the marginal resource cost of the worker. However, additional hiring would be unprofitable when the marginal resource cost exceeds the marginal revenue product. Copyright © 2007, Nelson, a division of Thomson Canada Ltd. . 10.2 Supply and Demand in the Labour Market The demand curve for labour is downward sloping. Higher wages will decrease the quantity of labour demanded, while lower wages will increase the quantity of labour demanded. Copyright © 2007, Nelson, a division of Thomson Canada Ltd. . 10.2 Supply and Demand in the Labour Market The major reason for the downwardsloping demand curve for labour is the law of diminishing marginal product. As increasing quantities of labour are added to fixed quantities of another input, output will rise, but at some point it will increase by diminishing amounts. The added output associated with one more worker—marginal product—declines as more workers are added and each has fewer fixed resources with which to work. Copyright © 2007, Nelson, a division of Thomson Canada Ltd. . Marginal Revenue Product The Marginal Revenue Product of Labour Marginal Revenue Product (demand curve for labour) 0 Quantity of labour Copyright © 2007, Nelson, a division of Thomson Canada Ltd. . Diminishing Marginal Productivity On A Hypothetical Farm Units of labour Input (workers) Total Wheat Output (bushels per year) Marginal Product of labour (bushels per year) 0 1 2 3 4 5 6 7 3000 5500 7000 8000 8500 8800 9000 3000 2000 1500 1000 500 300 200 Copyright © 2007, Nelson, a division of Thomson Canada Ltd. . 10.2 Supply and Demand in the Labour Market The marginal revenue product (MRP) is the change in total revenue associated with an additional unit of input. Copyright © 2007, Nelson, a division of Thomson Canada Ltd. . 10.2 Supply and Demand in the Labour Market The marginal revenue product is equal to the marginal product (the units of output added by a worker) multiplied by the marginal revenue (in the competitive output market case, this is price of the output). The marginal revenue product of labour declines because of the diminishing marginal product of labour. Copyright © 2007, Nelson, a division of Thomson Canada Ltd. . Marginal Revenue Product, Output, and Labour Inputs Marginal Product Price Marginal Wage Rate Quantity Total Output Product of labour (dollars per Revenue (MRC) of labour(bushels per week) (bushels per week) bushel) Product of labour (dollars per week) 0 1 2 3 4 5 6 7 8 0 100 190 270 340 400 450 490 520 100 90 80 70 60 50 40 30 Copyright © 2007, Nelson, a division of Thomson Canada Ltd. . $10 10 10 10 10 10 10 10 $1000 900 800 700 600 500 400 300 $550 550 550 550 550 550 550 550 10.2 Supply and Demand in the Labour Market Profits are maximized if a firm hires only to the point where Wage = expected marginal revenue product. Copyright © 2007, Nelson, a division of Thomson Canada Ltd. . 10.2 Supply and Demand in the Labour Market The firm will hire up to the last unit of input for which the marginal revenue product is expected to exceed the wage. Therefore, value of the marginal revenue product (MRP) is the same as the demand curve for labour for a competitive firm. It is why raising wages, ceteris paribus, lowers employment. Copyright © 2007, Nelson, a division of Thomson Canada Ltd. . 10.2 Supply and Demand in the Labour Market In a competitive labour market, many firms are competing for workers and no single firm is big enough by itself to have any significant effect on the level of wages. The firm is a wage taker. Copyright © 2007, Nelson, a division of Thomson Canada Ltd. . 10.2 Supply and Demand in the Labour Market The ability to hire all you wish at the prevailing wage is analogous to perfect competition in output markets, where a firm could sell all it wanted at the going price. Copyright © 2007, Nelson, a division of Thomson Canada Ltd. . The Competitive Firm’s Hiring Decision b. Firm’s Supply and Demand for labour Wage Rate Market Demand of labour W* Wage Rate a. Market Supply and Demand for labour Firm’s labour Supply (MRC) W* Market Demand for labour 0 Q* Quantity of labour Copyright © 2007, Nelson, a division of Thomson Canada Ltd. . 0 Firm’s Labour Demand (MRP) q* Quantity of labour 10.2 Supply and Demand in the Labour Market Just as the case in the law of supply, a positive relationship exists between wage level and the quantity of labour supplied. As the wage rate rises, the quantity of labour supplied increases, ceteris paribus. As the wage rate falls, the quantity of labour supplied falls, ceteris paribus. Copyright © 2007, Nelson, a division of Thomson Canada Ltd. . The Market Supply Curve of Labour Wage Rate S B W1 W0 A Q0 Q1 Quantity of labour Copyright © 2007, Nelson, a division of Thomson Canada Ltd. . 10.3 Labour Market Equilibrium At any wage higher than the equilibrium wage, the quantity of labour supplied exceeds the quantity of labour demanded, resulting in a surplus of labour; unemployed workers will be willing to undercut the established wage in order to get jobs, pushing the wage down and returning the market to equilibrium. Copyright © 2007, Nelson, a division of Thomson Canada Ltd. . 10.3 Labour Market Equilibrium At a wage below the equilibrium level, quantity demanded would exceed quantity supplied, resulting in a labour shortage; employers would be forced to offer higher wages in order to hire as many workers as they would like. Copyright © 2007, Nelson, a division of Thomson Canada Ltd. . 10.3 labour Market Equilibrium Only at the equilibrium wage are both suppliers (workers) and demanders (employers) able to exchange the quantity of labour they desire. Copyright © 2007, Nelson, a division of Thomson Canada Ltd. . Wage Rate Supply and Demand in the Labour Market QS > QD S QD > QS D W1 W* W2 0 Q* Quantity of labour Copyright © 2007, Nelson, a division of Thomson Canada Ltd. . 10.3 Labour Market Equilibrium Two important factors can shift the demand curve for labour. Increases in the demand curve for labour may arise from increases in labour productivity or increases in the price of the good, due, for example, to increases in the demand for the firm’s product. Copyright © 2007, Nelson, a division of Thomson Canada Ltd. . Shifts in the LabourCurve D0 0 b. Decrease in labour Demand Wage Rate Wage Rate a. Increase in labour Demand D1 D1 Quantity of labour Copyright © 2007, Nelson, a division of Thomson Canada Ltd. . 0 D0 Quantity of labour 10.3 Labour Market Equilibrium Workers can increase productivity if they have more capital or land with which to work; technological improvements occur; they acquire additional skills or experience. Copyright © 2007, Nelson, a division of Thomson Canada Ltd. . 10.3 Labour Market Equilibrium This increase in productivity will increase the marginal product of labour and shift the demand curve for labour to the right. However, if labour productivity falls, then marginal product will fall and the demand curve for labour will shift to the left. Copyright © 2007, Nelson, a division of Thomson Canada Ltd. . 10.3 Labour Market Equilibrium The greater the demand for the firm's product, the greater the firm’s demand for labour or any other variable input. Copyright © 2007, Nelson, a division of Thomson Canada Ltd. . 10.3 Labour Market Equilibrium Higher demand for the firm's product increases the firm's marginal revenue, which increases marginal revenue product. If demand for the firm's product falls, the labour demand curve will shift to the left, as marginal revenue product falls. Copyright © 2007, Nelson, a division of Thomson Canada Ltd. . 10.3 Labour Market Equilibrium Several factors can cause the labour supply curve to shift, immigration and population growth, the number of hours workers are willing to work at a given wage (worker tastes or preferences), nonwage income, amenities. Copyright © 2007, Nelson, a division of Thomson Canada Ltd. . 10.3 Labour Market Equilibrium If new workers enter the labour force, it will shift the labour supply curve to the right. If there are fewer workers in the labour force, it will cause the labour supply curve to shift to the left. Copyright © 2007, Nelson, a division of Thomson Canada Ltd. . 10.3 Labour Market Equilibrium If people become willing to work more hours at a given wage (due to changes in worker tastes or preferences), the labour supply curve will shift to the right. If they become willing to work fewer hours at a given wage, the labour supply curve will shift to the left. Copyright © 2007, Nelson, a division of Thomson Canada Ltd. . 10.3 Labour Market Equilibrium Increases in income from other sources than employment can cause the labour supply curve to shift to the left. A decrease in nonwage income might push a person back into the labour force, thus shifting the labour supply curve to the right. Copyright © 2007, Nelson, a division of Thomson Canada Ltd. . 10.3 Labour Market Equilibrium If there are amenities associated with a job, it will make for a more desirable work atmosphere, ceteris paribus. These amenities would cause an increase, or rightward shift, in the supply of labour. If job conditions deteriorate, it would lead to a reduction, or leftward shift, in the labour supply curve. Copyright © 2007, Nelson, a division of Thomson Canada Ltd. . 10.4 Labour Unions Labour unions are formed to increase their members’ wages and to improve working conditions. Workers realize that acting together, as a union of workers, gives them more collective bargaining power than acting individually. Copyright © 2007, Nelson, a division of Thomson Canada Ltd. . 10.4 Labour Unions Union membership in Canada has approximately 3.9 million members. This constitutes about 30% of the 12.8 million workers. Wide variations in union rates contribute to structural shifts in occupations of Canadian workers Provinces have differing rates of unionization (Newfoundland- 39% and Alberta 22%) which also contribute. Copyright © 2007, Nelson, a division of Thomson Canada Ltd. . 10.4 Labour Unions Unionization efforts have been particularly successful in the public sector rather than the private sector. However, unions have traditionally found it difficult to organize workers in white-collar jobs (professional, scientific) in agriculture, and in technical and hospitality Copyright © 2007, Nelson, a division of Thomson Canada Ltd. . 10.4 Labour Unions Labour unions influence the quantity of union labour hired and the wages at which they are hired primarily through their ability to alter the supply of labour services to employers from what would exist if workers acted independently. Copyright © 2007, Nelson, a division of Thomson Canada Ltd. . 10.4 Labour Unions By restricting membership or available manpower, unions reduce the quantity of labour supplied, and increase wages in that occupation. Union workers will now receive higher wages; others will become unemployed. Many economists believe that this is why wages are approximately 15 percent higher in union jobs, even when nonunion workers have comparable skills. Some of these gains will go to unions as dues, initiation fees, etc. Copyright © 2007, Nelson, a division of Thomson Canada Ltd. . S1 S0 W1 W0 Wage Rate Wage Rate The Effect of Unions on Wages S0 W0 W2 D 0 Q1 Q0 Quantity of Labour Copyright © 2007, Nelson, a division of Thomson Canada Ltd. . S1 D 0 Q0 Q1 Quantity of Labour 10.4 Labour Unions If unions are successful in obtaining higher wages, that will also cause employment to fall in the union sector. With a downward-sloping demand curve for labour, higher wages mean that less labour is demanded in the union sector. Copyright © 2007, Nelson, a division of Thomson Canada Ltd. . 10.4 Labour Unions Those workers who are equally skilled but are unable to find union work will seek nonunion work, thus increasing supply in that sector and, in turn, lowering wages in the nonunion sector. Thus, comparably skilled workers will experience higher wages in the union sector than in the nonunion sector. Copyright © 2007, Nelson, a division of Thomson Canada Ltd. . 10.4 Labour Unions Some argue unions might actually increase worker productivity by providing a collective voice to communicate workers’ discontents effectively. lower number of exits, which is costly for firms by handling worker’s grievances, may increase workers’ motivation and morale. Copyright © 2007, Nelson, a division of Thomson Canada Ltd. . 10.4 Labour Unions While it appears that unions tend to lower the profitability of firms, not raise it they do play a larger role in the lives of, and consequently benefit, individuals previously marginalized in the workplace. (women and minorities) Copyright © 2007, Nelson, a division of Thomson Canada Ltd. . 10.5 Land and Rent Economic rent is the price paid for land or any other factor that has a fixed supply—a perfectly inelastic supply curve. The supply of land is perfectly inelastic and not at all responsive to prices. There will be as much land available at a zero price as at a very high price. Copyright © 2007, Nelson, a division of Thomson Canada Ltd. . 10.5 Land and Rent The price of using land—its rental price—is determined by demand and supply considerations. Changes in the demand for land will change the rental value. Because the supply curve is completely inelastic, the demand curve determines the price of the land. Copyright © 2007, Nelson, a division of Thomson Canada Ltd. . 10.5 Land and Rent If demand is high, the rental price of land is high; if demand is low, the rental price of land is low. Only changes in the demand for land will change the price of land. Copyright © 2007, Nelson, a division of Thomson Canada Ltd. . Price of Land (R) Supply and Demand in the Land Market S RH DHigh RL 0 DLow Q Quantity of Land Copyright © 2007, Nelson, a division of Thomson Canada Ltd. . 10.5 Land and Rent The demand for land is derived from the demand for the products being produced. If supply is fixed, an increase in demand for the output raises the output price. This in turn raises the demand and rents for land, due to its greater marginal revenue product as a factor of production. Copyright © 2007, Nelson, a division of Thomson Canada Ltd. . 10.5 Land and Rent The concept of economic rent does not only apply to land. It is a very powerful tool to understanding labour. Differences between productive resources give rise to variations in productivity and thus to variations in compensation. Copyright © 2007, Nelson, a division of Thomson Canada Ltd. . 10.5 Land and Rent Labour resources that are in highly limited supply and in great demand will command a large amount in compensation. People who receive income because of a distinct, unique skill are collecting economic rent—compensation for a resource whose supply is perfectly inelastic over the relevant range of prices. Copyright © 2007, Nelson, a division of Thomson Canada Ltd. . 10.5 Land and Rent Examples star athletes, famous surgeons, and music stars, Nearly every resource owner has some ability of skill that allows him to earn at least a little economic rent. Copyright © 2007, Nelson, a division of Thomson Canada Ltd. . 10.6 Capital and Interest Resources like capital can be “leased” or “rented” for some stipulated period of time. Following the law of demand, the lower the rental price of a machine, the lower the cost of production when using it, and the greater the quantity of machines demanded. Copyright © 2007, Nelson, a division of Thomson Canada Ltd. . 10.6 Capital and Interest Following the law of supply, the greater the rental price of machines, the more willing owners of those machines are to supply them to entrepreneurs. Copyright © 2007, Nelson, a division of Thomson Canada Ltd. . 10.6 Capital and Interest The price of borrowed funds is called the interest rate. At lower interest rates, the cost of financing the purchase of a machine is lower; capital costs are lower; the quantity of funds demanded is greater. Copyright © 2007, Nelson, a division of Thomson Canada Ltd. . 10.6 Capital and Interest The lenders of funds will derive greater income the greater the interest rate, so the benefits to them of making a loan increase as interest rates (the price of funds) rise. Thus, the quantity of funds supplied is positively related to interest rates. Copyright © 2007, Nelson, a division of Thomson Canada Ltd. . 10.6 Capital and Interest The intersection of the upward-sloping supply curve for capital and the downward-sloping demand curve for capital determines the price of capital. Copyright © 2007, Nelson, a division of Thomson Canada Ltd. . Rental Price of Capital The Supply and Demand For Capital Goods S P D 0 Q Quantity of Capital Copyright © 2007, Nelson, a division of Thomson Canada Ltd. . 10.6 Capital and Interest A firm making an investment decision must consider the price of the new capital that they must pay now with the additional revenue the firm anticipates to make over time. That is, the firm must compare current cost with future benefits. To figure out how much those future benefits are worth today, economists use a concept called present value. Copyright © 2007, Nelson, a division of Thomson Canada Ltd. . 10.6 Capital and Interest The present value of future income is the value of having that future income now. People prefer to have money now rather than later; that is why they are willing to pay interest to borrow it. PV = $X / (1 + r)t Copyright © 2007, Nelson, a division of Thomson Canada Ltd. . 10.6 Capital and Interest Because the discount rate varies from person to person, a good proxy is the market rate of interest. An investor will buy capital if the expected discounted present value of the capital exceeds the current price. Therefore, falling interest rates lead to greater investment. Copyright © 2007, Nelson, a division of Thomson Canada Ltd. . Present Value Table Year 3% 6% 8% 1 0.9709 0.9434 0.9259 2 1.9135 1.8334 1.7833 3 2.8286 2.6730 2.5771 4 3.7171 3.4651 3.3121 5 4.5797 4.2124 3.9927 6 5.4172 4.9173 4.6229 7 6.2303 5.5824 5.2064 8 7.0197 6.2098 5.7466 9 7.7861 6.8017 6.2469 10 8.5302 7.3601 6.7101 11 9.2526 7.8869 7.1390 12 9.9540 8.3838 7.5361 13 10.6350 8.8527 7.9038 14 11.2961 9.2950 8.2442 15 11.9379 9.7122 8.5595 16 12.5611 10.1059 8.8514 17 13.1661 10.4773 9.1216 18 13.7535 10.8276 9.3719 19 14.3238 11.1581 9.6036 20 14.8775 11.4699 9.8181 30 a division 19.6004 Copyright © 2007, Nelson, of Thomson13.7648 Canada Ltd. 11.2578 . 10% 0.9091 1.7355 2.4869 3.1699 3.7908 4.3553 4.8684 5.3349 5.7590 6.1446 6.4951 6.8137 7.1034 7.3667 7.6061 7.8237 8.0216 8.2014 8.3649 8.5136 9.4269 15% 0.8696 1.6257 2.2832 2.8550 3.3522 3.7845 4.1604 4.4873 4.7716 5.0188 5.2337 5.4206 5.5831 5.7245 5.8474 5.9542 6.0472 6.1280 6.1982 6.2593 6.5660 Year 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 30 10.6 Capital and Interest We have treated the labour, capital, and land markets independently. In reality, these markets are interdependent. For example, if wages rise and/or the rental price of capital falls, machines might be substituted for some workers. Copyright © 2007, Nelson, a division of Thomson Canada Ltd. . 10.7 Income Distribution The ultimate purpose of producing goods and services is to satisfy the material wants of people. But for whom does society produce consumer goods and services? Why are some people able to consume much more than others? Copyright © 2007, Nelson, a division of Thomson Canada Ltd. . Mean Household Income by Quintile Copyright © 2007, Nelson, a division of Thomson Canada Ltd. . 10.7 Income Distribution While there have been changes in the distribution of measured income, there remains substantial income inequality. Inequality might be overstated due to failure to consider differences in age, certain demographic factors, institutional factors, and government redistributive activities. Copyright © 2007, Nelson, a division of Thomson Canada Ltd. . Copyright © 2007, Nelson, a division of Thomson Canada Ltd. . 10.7 Income Distribution At any moment in time, middle-age persons tend to have higher incomes than younger and older persons because they are at an age when their productivity is at a peak and they are participating in the labour force to a greater extent. Copyright © 2007, Nelson, a division of Thomson Canada Ltd. . 10.7 Income Distribution Even if every individual earned exactly the same income over his or her lifetime, there would still be inequality at any given moment in time, so that inequality resulting from this overstates the true inequality in the lifetime earnings of people. The increased proportion of Canadians that are either very young or very old has tended to increase the observed inequality in the distribution of income. Copyright © 2007, Nelson, a division of Thomson Canada Ltd. . 10.7 Income Distribution Other demographic trends have also caused the measured distribution of income (measured in terms of household or family income) to appear more unequal. increased number of divorced couples rise of two-income families DINKS (Double Income, No Kids) Copyright © 2007, Nelson, a division of Thomson Canada Ltd. . 10.7 Income Distribution A family that decides to have two bread winners instead of one would move into a higher income quintile and create greater apparent income inequality. At the same time, divorces create two households instead of one, lowering income per household for divorced couples; thus, they move into lower income quintiles, also creating greater apparent income inequality. Copyright © 2007, Nelson, a division of Thomson Canada Ltd. . 10.7 Income Distribution The impact of increased government activity should be considered in evaluating the measured income distribution. Government-imposed taxes burden different income groups differently. Also, many government programs benefit some groups of income recipients more than others. Copyright © 2007, Nelson, a division of Thomson Canada Ltd. . 10.7 Income Distribution When taxes and in-kind income are included, many economists conclude that they have served to reduce levels of inequality significantly from the levels suggested by aggregate income statistics. Copyright © 2007, Nelson, a division of Thomson Canada Ltd. . 10.7 Income Distribution However, if we consider age distribution, institutional factors, and inkind transfer programs, it is safe to say that the income distribution is considerably more equal than it appears. Copyright © 2007, Nelson, a division of Thomson Canada Ltd. . 10.7 Income Distribution While the distribution of current income is an important piece of information, it is also critical to know how much movement goes on between different income levels. The people that make up a given income group are not always the same people because there is substantial movement between income groups. Copyright © 2007, Nelson, a division of Thomson Canada Ltd. . 10.7 Income Distribution Reasons people differ in income age Wages generally increase up to the age of 50 and fall dramatically at retirement age. Younger people tend to make little income when they begin their working careers. skill education Training, discrimination, preferences toward risk and leisure. Copyright © 2007, Nelson, a division of Thomson Canada Ltd. . 10.7 Income Distribution As productivity increases, workers can command higher wages. Some workers are just more productive than others, as a result of both innate skills and training and education. Some workers’ skills are just more in demand than others. Those that work longer hours or more intensely earn more. Copyright © 2007, Nelson, a division of Thomson Canada Ltd. . 10.7 Income Distribution Those who prefer more amenities at work or more time for leisure earn less. Those who work in riskier or more unpleasant jobs earn more as compensation. Despite difficulties in measurement, international comparisons of income distribution have been made. Copyright © 2007, Nelson, a division of Thomson Canada Ltd. . 10.8 Poverty Our concern over income distribution largely arises because of a feeling that people with low incomes (“the poor”) suffer in a material sense relative to other persons. Copyright © 2007, Nelson, a division of Thomson Canada Ltd. . 10.8 Poverty Economic growth can have important effects on poverty and welfare. Those most likely to be poor: Unattached individuals Single parent families headed by females Less than a high school education Copyright © 2007, Nelson, a division of Thomson Canada Ltd. . 10.8 Poverty The evidence suggests Income distribution in Canada has been relatively stable since 1951. That regardless of national wealth some Canadians live in poverty Economic factors contribute to this income diversity. Copyright © 2007, Nelson, a division of Thomson Canada Ltd. . Low Income Cut-offs (2000) Copyright © 2007, Nelson, a division of Thomson Canada Ltd. . Incidence of Low Income by Households (2000) Copyright © 2007, Nelson, a division of Thomson Canada Ltd. . 10.8 Poverty Statistics Canada measures poverty by using a set of money income thresholds that vary by family size and are adjusted for inflation. If the family’s total income is less than the established threshold—the poverty line—it is considered poor or below the Low Income Cut Off. (LICO) The poverty rate is the proportion of persons who fall below that absolute standard. Copyright © 2007, Nelson, a division of Thomson Canada Ltd. . 10.8 Poverty LICO for Canada is currently set at : $24 186 for a family of four in a small city $15 172 for a single person in a large city LICO levels are defined by the percentage of income used for necessities. Households that spend 64% or more of after tax dollars on shelter, food and clothing are defined as poor. The poverty rate may overstate the level of poverty because it does not include noncash benefits of some available public assistance. Copyright © 2007, Nelson, a division of Thomson Canada Ltd. . 10.8 Poverty With a definition of poverty that is determined at some fixed, real income level, poverty over time should decline unless lower income groups do not share at all in rising incomes because real incomes generally rise over time with economic growth. Copyright © 2007, Nelson, a division of Thomson Canada Ltd. . 10.8 Poverty Thus, one cure for poverty, as defined by some absolute income or standard of living criterion, is economic growth. The greater the rate of economic growth, the more rapidly poverty will be reduced or eradicated. Copyright © 2007, Nelson, a division of Thomson Canada Ltd. . 10.8 Poverty Many “poor” individuals in Canada, using the official definition, would be considered well off, even “rich” in many less-developed countries. Rather than being classified by an ability to buy some specific basket of goods and services, poverty is often thought of as a relative income concept. Copyright © 2007, Nelson, a division of Thomson Canada Ltd. . 10.8 Poverty A person is “poor” if his or her income is low relative to the incomes of most other persons in the same geographical area. Copyright © 2007, Nelson, a division of Thomson Canada Ltd. . 10.8 Poverty Using definitions of poverty based on relative income measures, as economic growth proceeds, the income necessary to avoid being considered poor by this measure increases. Using this definition, then, poverty cannot be eradicated by economic growth, but only by income redistribution. Copyright © 2007, Nelson, a division of Thomson Canada Ltd. .