How is the distribution of income measured, and why does inequality matter for an economy?
2.1 Inequality: the difference between income and wealth, the measurement of inequality through the Lorenz curve and Gini coefficient, the causes of inequality, and the equity-efficiency trade-off.
An OCR H460 answer to inequality, covering the difference between income and wealth, the Lorenz curve and Gini coefficient, the causes of income and wealth inequality, and the equity-efficiency trade-off in redistribution.
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What this dot point is asking
OCR wants you to distinguish income from wealth, to measure inequality using the Lorenz curve and the Gini coefficient, to explain the causes of inequality, and to evaluate the equity-efficiency trade-off involved in redistribution.
Income and wealth
Measuring inequality
The causes of inequality
Income and wealth inequality arise from several sources: differences in skills and education (higher human capital earns more), inherited wealth and unequal asset ownership (which compounds over generations), differences in bargaining power (unionised versus precarious work), discrimination, regional differences, and the structure of the tax and benefit system. Globalisation and technological change can widen inequality by rewarding high-skilled workers and capital owners while squeezing routine jobs.
The equity-efficiency trade-off
The trade-off is not absolute. Some redistribution can support efficiency: reducing poverty traps, improving health and education (raising human capital and productivity), sustaining demand from lower-income households who spend a high share of income, and lowering the social costs of extreme inequality. The outcome depends on how redistribution is designed, which is a rich source of evaluation marks.
Examples in context
- UK income inequality. The UK Gini coefficient for disposable income is around the low 0.3s, moderate by international standards, having risen sharply in the 1980s.
- Wealth versus income. UK wealth is far more concentrated than income, with the top decile owning a large multiple of the bottom half's wealth, driven by property and pensions.
- Progressive taxation. Income tax bands and the personal allowance redistribute income, illustrating the equity-efficiency trade-off at the centre of fiscal debates.
Try this
Q1. Distinguish between income and wealth. [3 marks]
- Cue. Income is a flow over time (wages, benefits); wealth is a stock of assets at a point in time (property, shares).
Q2. Explain what a Gini coefficient of 0 and a Gini coefficient of 1 represent. [3 marks]
- Cue. 0 is perfect equality (everyone has the same income); 1 is perfect inequality (one person has all the income).
Exam-style practice questions
Practice questions written in the style of OCR exam questions on this dot point, with worked answer explainers. The year tag is the paper they imitate, not the source.
OCR H460/02 20204 marksIn a Lorenz-curve diagram, the area between the line of perfect equality and the Lorenz curve is 0.18, and the total area beneath the line of perfect equality is 0.5. Calculate the Gini coefficient and state what it indicates.Show worked answer →
A short calculate question. The Gini coefficient is the area between the line of perfect equality and the Lorenz curve, divided by the total area beneath the line of perfect equality.
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A Gini coefficient of 0.36 indicates moderate inequality: 0 would be perfect equality (everyone has the same income) and 1 would be perfect inequality (one person has all the income). So 0.36 is well above perfect equality but below extreme inequality.
Markers reward the correct ratio, the value 0.36, and an interpretation that higher values mean more inequality (0 equal, 1 maximally unequal).
OCR H460/02 202212 marksEvaluate the view that reducing income inequality always harms economic efficiency.Show worked answer →
A levels-of-response question. Knowledge and application: define income inequality and the Gini coefficient, and explain the equity-efficiency trade-off: redistribution through progressive taxes and benefits may blunt incentives to work, save and take risks, reducing efficiency.
Analysis: develop how high marginal tax rates or generous benefits could reduce labour supply and entrepreneurship.
Evaluation: counter that some redistribution can raise efficiency: it can reduce poverty traps, improve health and education (human capital), raise demand from high-spending lower-income groups, and reduce the social costs of extreme inequality. The effect depends on how redistribution is done. Conclude that it does not always harm efficiency; well-designed measures can support it.
Related dot points
- 2.1 Economic policy objectives: economic growth, low and stable inflation, low unemployment, a satisfactory balance of payments, and other objectives such as low inequality and environmental sustainability.
An OCR H460 answer to the macroeconomic objectives, covering economic growth, low and stable inflation, low unemployment and a satisfactory balance of payments, plus wider objectives such as low inequality and environmental sustainability, and how performance is judged and traded off.
- 2.1 Measuring growth: real and nominal GDP, GDP per capita, index numbers and the rate of growth, the difference between actual and potential growth, and the limitations of GDP.
An OCR H460 answer to measuring economic growth, covering real and nominal GDP, GDP per capita, index numbers and growth rates, actual versus potential growth, and the limitations of GDP as a measure of living standards and welfare.
- 2.4 Economic development: the difference between growth and development, the measurement of development including the HDI, the barriers to development, and strategies to promote development.
An OCR H460 answer to economic development, covering the difference between growth and development, the measurement of development including the Human Development Index, the barriers to development, and market-based and interventionist strategies to promote it.
- 2.3 Fiscal policy: government spending and taxation, the budget balance and the national debt, direct and indirect and progressive and regressive taxes, automatic stabilisers, and the strengths and weaknesses of fiscal policy.
An OCR H460 answer to fiscal policy, covering government spending and taxation, the budget balance and the national debt, direct versus indirect and progressive versus regressive taxes, automatic stabilisers, and the strengths and weaknesses of fiscal policy in managing aggregate demand.
Sources & how we know this
- OCR A Level Economics (H460) Specification — OCR (2023)