The Importance of Knowing the Poverty Cycle

Let's take a look at a really heart-touching concept in economics called The Poverty Cycle.

This is covered in my Global Economy Course, and because of my life experience, I really think it’s important to teach.

The Poverty Cycle explains why it’s so difficult for people born into poverty to escape it.

It’s not about effort or intelligence; it’s about the generational circumstances that shape opportunities.

Understanding this cycle opens our eyes to the broader realities of inequality and the systemic challenges people face across the world.

What is the Poverty Cycle?

The Poverty Cycle refers to a situation where low income leads to low savings, which leads to low investment, and ultimately results in low economic growth. This cycle perpetuates itself, making it incredibly difficult for families—or entire nations—to break free.

Imagine a family with limited income:

  • They can’t save money to invest in education, healthcare, or opportunities for economic advancement.
  • Without education or healthcare, members of the family can’t achieve higher productivity.
  • This low productivity results in continued low income, keeping the cycle spinning for generations.


Breaking this cycle requires more than hard work—it demands opportunities that often lie outside the control of the individual.

Two Types of Poverty

To understand the poverty cycle, we need to differentiate between relative poverty and absolute poverty:

  1. Relative Poverty:
    • This is measured within a specific country. For example, if someone earns less than 50% of the average income in their nation, they’re considered relatively poor.
    • Relative poverty highlights inequality within societies, even in wealthy nations.
  2. Absolute Poverty:
    • This is the inability to meet basic survival needs, such as food, clothing, and shelter.
    • The World Bank defines absolute poverty as living on less than $1.25 per day, adjusted for purchasing power parity (PPP).
    • In countries like Madagascar and Niger, over 60% of the population lives in absolute poverty, surviving on less than $2 per day.


These forms of poverty show how systemic and widespread the problem can be, particularly in developing nations.

My Experience with the Poverty Cycle

As a Peace Corps volunteer in the Dominican Republic, I witnessed the poverty cycle firsthand.

Many people in the rural areas I worked in couldn’t read—often because, as the oldest children in their families, they had to care for younger siblings instead of attending school.

This lack of education limited their opportunities:

  • Without literacy, they couldn’t qualify for basic jobs, let alone higher-paying ones.
  • They were effectively trapped in subsistence-level work, unable to break free from poverty despite their intelligence and effort.

The experience taught me that poverty is rarely about individual ability—it’s about systemic barriers and lack of opportunity.

Breaking the Cycle

Breaking the poverty cycle starts with education.

Education is the single most powerful tool for generational change:

  • A child who earns a university degree can access higher-paying jobs, move their family out of poverty, and provide better opportunities for the next generation.
  • Investments in public education and healthcare can improve human capital, productivity, and economic growth at the national level.

But education alone isn’t enough. Breaking the cycle also requires systemic support:

  • Healthcare: Access to basic healthcare ensures people can work and contribute productively.
  • Investment: Low-income families and nations need financial support to invest in infrastructure, education, and industries.
  • Savings: Programs that encourage or facilitate savings can provide a safety net, reducing vulnerability to shocks like illness or job loss.


Why This Matters

The poverty cycle isn’t just an economic concept—it’s a deeply human issue.

It reminds us that opportunity is often determined by birth, not effort.

Recognizing this allows us to approach poverty with empathy and a commitment to systemic change.

As you study this concept, I encourage you to think about your own opportunities. How did generational circumstances shape them? By understanding the poverty cycle, we can better appreciate the privileges we have—and advocate for policies that create opportunities for others.

Breaking the poverty cycle is a monumental task, but it’s possible.

Education, healthcare, and investment can create generational change, turning cycles of poverty into cycles of growth.

And everyone on this beautiful earth deserves that.

If you are interested in learning more, join 6,300+ students worldwide who have purchased my Global Economy online course.


Thanks for reading.