Pearson Edexcel International Advanced Level Economics: Poverty and inequality (YEC11) – Practice Questions

These are original questions written for Marlbridge, for revision and practice on this content. They are not reproduced past-paper questions, and they do not replicate the exam’s exact structure, question count or mark tariffs – examination boards hold copyright in their own papers. Use these alongside the official past papers from your board or school.

These questions cover topic 4.3.4, Poverty and inequality, from Unit 4: Developments in the global economy, in the Pearson Edexcel International Advanced Subsidiary/Advanced Level in Economics specification (Issue 2, June 2018). Unit 4 is one of the extra International A2 units. Every country, household and figure is invented for illustration. Learn the content first from the study guide and the revision notes. Also see the Edexcel A Level Economics hub and the printable checklist.

Questions

1. Distinguish between absolute poverty and relative poverty. [2]

2. In Country Beta the median household income is 2,400 a month and a household is counted in relative poverty if its income is under 60% of that median. Household H earns 1,500 a month.

(a) Calculate the poverty line and state whether Household H is in relative poverty. [2]

(b) The median rises 10% and Household H’s income rises 4%. Show that Household H is now in relative poverty and state what this suggests about absolute poverty. [2]

3. Country Beta had 50 million people, of whom 12 million were in absolute poverty. Later it had 55 million people, of whom 11 million were in absolute poverty.

(a) Calculate the headcount ratio in each year. [2]

(b) Comment on the change in the number of people in poverty. [1]

4. Country M has income shares by fifth, poorest to richest, of 6%, 10%, 15%, 22% and 47%.

(a) Calculate the cumulative income shares. [2]

(b) Calculate the Gini coefficient. [3]

(c) Describe the shape of the Lorenz curve for Country M compared with the line of equality. [1]

5. After taxes and benefits Country M’s income shares become 9%, 13%, 17%, 22% and 39%.

(a) Calculate the new Gini coefficient. [2]

(b) Explain what the change in the Gini coefficient shows and state one limitation of the measure. [2]

6. Distinguish between income inequality and wealth inequality, and explain why wealth is usually more unequally distributed. [4]

7. Country A has income per head of 30,000 and Country B has 1,500. Country A’s income per head grows 1.5% and Country B’s grows 5%.

(a) Calculate the ratio of A’s income per head to B’s before and after growth. [2]

(b) Calculate the absolute gap before and after growth. [2]

(c) Comment on your results. [1]

8. A worker in Country D earns an extra 200 a month. Means-tested benefits are withdrawn at a rate of 45% of each extra unit earned and the worker pays 20% tax on the extra income. Calculate the effective marginal tax rate and show the worker’s net gain. [4]

9. In Country E total income rises from 1,000 to 1,100 but the share of the poorest fifth falls from 6% to 5%. Evaluate the view that economic growth is the best way to reduce poverty. [10]

10. Assess the view that inequality harms enterprise, savings and education. [10]

11. Evaluate the significance of the free market economy for inequality. [8]

Answers

1. Absolute poverty means income below a fixed real level needed for basic needs [1]. Relative poverty means income far below the typical income of the society, so the line moves with average incomes [1]. [2] Examiner insight: answers tend to gain credit when they say which line is fixed and which moves, rather than describing “poor” and “very poor”.

2. (a) Line = 0.6 x 2,400 = 1,440 [1]. Household H earns 1,500, which is above the line, so it is not in relative poverty [1]. [2] (b) New median 2,640, new line 0.6 x 2,640 = 1,584 [1]. H’s income is 1,500 x 1.04 = 1,560, which is 24 below the line. Absolute poverty may have fallen because H’s real income rose [1]. [2] Examiner insight: “show that” answers need the new line and the new income both calculated, followed by the comparison.

3. (a) Year one: 12 / 50 = 24% [1]. Later: 11 / 55 = 20% [1]. [2] (b) The number in poverty fell by 1 million even though the population rose by 5 million, so the fall in poverty is greater in proportion than in number [1]. [1] Examiner insight: give the ratio first, then comment on the number; the two measures say different things.

4. (a) Cumulative shares: 6, 16, 31, 53, 100 [2]. [2] (b) Area under the Lorenz curve B = 0.2 x [(0 + 0.06)/2 + (0.06 + 0.16)/2 + (0.16 + 0.31)/2 + (0.31 + 0.53)/2 + (0.53 + 1)/2] [1] = 0.2 x 1.56 = 0.312 [1]. Gini = 1 - 2 x 0.312 = 0.376 [1]. [3] (c) The curve bows below the 45-degree line, starting at the origin and ending at 100% on both axes, showing unequal incomes [1]. [1] Examiner insight: show the area calculation and the final formula; an unsupported Gini gives little to credit if it is wrong.

5. (a) Cumulative: 9, 22, 39, 61, 100 [1]. B = 0.2 x (0.045 + 0.155 + 0.305 + 0.5 + 0.805) = 0.362, so the Gini is 1 - 0.724 = 0.276 [1]. [2] (b) The Gini fell by 0.1 (0.376 to 0.276), so taxes and benefits made the distribution more equal [1]. Limitation: grouped data hide the top, or one number does not show where the change occurred [1]. [2] Examiner insight: say the direction of change and what it means, using the figures.

6. Income is a flow earned over a period [1]. Wealth is the stock of what a household owns after subtracting what it owes [1]. Wealth accumulates over a lifetime and is inherited, so gaps build up [1]. Wealth earns income, so owners gain further, widening the gap [1]. [4] Examiner insight: contrast stock and flow explicitly; an explanation of “why” needs a mechanism such as inheritance or returns on assets.

7. (a) Before: 30,000 / 1,500 = 20 [1]. After: A = 30,450, B = 1,575, ratio 19.3 [1]. [2] (b) Before: 28,500 [1]. After: 30,450 - 1,575 = 28,875 [1]. [2] (c) The ratio narrows but the absolute gap widens, so the verdict depends on the measure used [1]. [1] Examiner insight: state which measure your comment refers to.

8. Benefits lost = 0.45 x 200 = 90 [1]. Tax = 0.20 x 200 = 40 [1]. Net gain = 200 - 90 - 40 = 70 [1]. Effective marginal tax rate = (90 + 40) / 200 = 65% [1]. [4] Examiner insight: include both the withdrawn benefit and the tax in the rate.

9. Bottom fifth’s income: 60 becomes 55, a fall of 8.3% [1]. Total income rose 10% [1]. So growth did not reduce poverty here because distribution worsened [1]. Growth can reduce poverty where it creates jobs and tax revenue for services [1]. A poverty rate that falls with mean income shows growth works [1]. Education and training raise earnings [1]. Benefits and progressive taxes target the poor directly [1]. Aid or peace may matter more in some countries [1]. Judgement: growth is necessary but not sufficient; it works best when broad-based and combined with redistribution and skills [1]. A reasoned conclusion linked to context [1]. [10] Examiner insight: strong evaluations use the data given, compare policies against each other and reach a supported judgement.

10. Enterprise: reward encourages risk-taking [1], but poor people face credit and demand barriers [1]. Savings: the rich have a higher marginal propensity to save [1], which funds investment, but weak consumption demand may offset it [1]. Education: poor families cannot fund schooling [1], so human capital is wasted [1], and productivity and growth suffer [1]. Size and time: effects depend on how extreme the inequality is and on the length of the period [1]. Policy context, such as state schooling, changes the outcome [1]. Judgement: moderate inequality may help incentives, but extreme inequality harms education most [1]. [10] Examiner insight: cover all three areas with a counter-point each, then weigh them.

11. Prices reward productivity and risk, so unequal rewards follow [1]. This creates incentives and can raise growth and average incomes [1]. Inheritance, market power and unequal access to credit widen gaps [1]. No automatic redistribution, so the poor may be left behind [1]. Merit goods may be underprovided [1]. Governments use progressive taxes, transfers and services [1]. Intervention can reduce incentives and efficiency [1]. Judgement: the market produces inequality but the size depends on policy [1]. [8] Examiner insight: answers gain credit by linking market features to inequality and then judging how far intervention changes it.

Where marks are usually lost

• Calculating a poverty line from the wrong base year.
• Giving a headcount ratio without the units, or confusing it with the number of poor people.
• Forgetting the starting point at zero in cumulative shares.
• Reporting the area under the Lorenz curve as the Gini.
• Reading a higher Gini as more equality.
• Not distinguishing a ratio from an absolute gap.
• Describing effects of inequality with no counter-point.
• Ending an evaluation with a summary and no judgement.

Next steps

• Recap with the revision notes and the study guide.
• Use the course hub and the printable checklist.
• Try all the free 10-minute diagnostics.
• Book a free trial class at /trial/.

Official syllabus

Pearson Edexcel International Advanced Subsidiary/Advanced Level in Economics specification, Issue 2, June 2018, Pearson Education Limited: Unit 4, topic 4.3.4 Poverty and inequality, points 1 and 2.