The poverty trap is a self-perpetuating condition where a person, a society, or an economy is caught in a vicious cycle of persistent underdevelopment or poverty. Ciccone and Matsuyama (1996) showed how the economy can be caught in a poverty trap. The basic mechanism is that advanced technologies require the use of highly specialized equipment and producer services. In the underdeveloped economy, the limited availability of specialized inputs forces the downstream industries to rely on less advanced technologies, which do not require the use of specialized inputs. This, in turn, leads to small market size for specialized firms in the upstream industries. Hence, the economy is caught in the vicious cycle of limited market size and limited division of labor.

This can also affect an individual. For example, a person comes from a poor family, gets student loans to go to school and once they graduate, they find a low paying job and have to pay back student loans as well as take care of their family. Due to these pressing issues, they remain in poverty and their children go to school in poor neighborhoods so the cycle of poverty continues from generation to generation.

Review the following resources to prepare for this discussion

• Is the poverty trap a macroeconomic issue for this nation?
  • Defend your position.
• What are some solutions or government actions that can limit or eliminate poverty in society?
• As the US economy has grown, the gap between the rich and the poor has continued to grow. What are some factors fueling this divide?
  • What is a proper Christian response to poverty?
  • Is donating or giving money the answer?

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