How do economists measure poverty and inequality, and what causes them?
Absolute and relative poverty, the measurement of inequality using the Lorenz curve and Gini coefficient, the causes and effects of inequality, and the distinction between wealth and income.
An Edexcel A-Level Economics A answer to poverty and inequality, covering absolute and relative poverty, the difference between income and wealth, the measurement of inequality using the Lorenz curve and Gini coefficient, the causes of inequality, and the role of capitalism and redistribution policy.
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What this dot point is asking
Edexcel wants you to distinguish absolute from relative poverty, distinguish income from wealth, explain how inequality is measured with the Lorenz curve and Gini coefficient, and explain the causes and effects of inequality.
Poverty: absolute and relative
Income and wealth
Measuring inequality
Causes and effects of inequality
Inequality arises from differences in wages and MRP, the unequal ownership of wealth, differences in education and skills, unemployment, globalisation and technology favouring skilled workers, and the structure of the tax-and-benefit system. Some inequality sharpens incentives to work, gain skills and invest, but extreme inequality can reduce social mobility, harm health, lower the consumption of high-MPC households and slow growth. Governments redistribute through progressive taxes, benefits and spending on health and education, facing an efficiency-equity trade-off.
Examples in context
- UK Gini. The UK's disposable-income Gini is around , higher than most of Western Europe, after the tax-benefit system cuts it from a higher market-income Gini.
- Global poverty fall. Absolute poverty fell from over of the world in 1990 to under , driven largely by growth in China and India.
- Top 1 per cent. Rising shares of income and wealth at the very top, especially capital income, are central to inequality debates (Piketty).
- Universal Credit. A UK transfer designed to support low-income households and reduce relative poverty, a redistribution example.
Try this
Q1. Distinguish between absolute and relative poverty. [3 marks]
- Cue. Absolute is inability to afford basic necessities (fixed threshold); relative is income well below the societal average (for example below of median).
Q2. Explain what a Gini coefficient of tells you about a country. [3 marks]
- Cue. It shows moderate inequality, partway between perfect equality (0) and perfect inequality (1).
Exam-style practice questions
Practice questions written in the style of Pearson Edexcel exam questions on this dot point, with worked answer explainers. The year tag is the paper they imitate, not the source.
Edexcel 20184 marksThe poorest of households receive of income and the richest receive . Calculate the ratio of the richest to poorest quintile share, and state what it suggests about inequality.Show worked answer →
A short calculate question reading quintile shares (Lorenz-curve data).
Quintile share ratio .
The richest fifth receives about times the income share of the poorest fifth, indicating significant income inequality. A higher ratio means a more bowed Lorenz curve and a higher Gini coefficient.
Markers reward (1) the ratio , (2) interpreting it as the richest fifth earning over five times the poorest fifth's share, (3) linking to the Lorenz curve or Gini.
Edexcel 202212 marksAssess the view that some income inequality is necessary for an economy to function well.Show worked answer →
A 12 mark question (around 8 KAA, 4 evaluation).
KAA: explain that inequality provides incentives to work, gain skills, take risks and invest (returns to education and enterprise raise efficiency and growth), supported by the link between wages and MRP.
Evaluation: extreme inequality reduces social mobility, harms health and education, lowers the consumption of high-MPC households and can slow long-run growth (OECD). The optimum is some, not extreme, inequality, and redistribution involves an efficiency-equity trade-off. Reach a judgement.
Markers reward the incentives argument, the costs of extreme inequality and balance.
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Sources & how we know this
- Pearson Edexcel A-Level Economics A (9EC0) specification — Pearson Edexcel (2015)