Pearson Edexcel International Advanced Level Economics: Poverty and inequality (YEC11) – Revision Notes

These notes condense 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, so it is full International A Level only. For explanations and longer worked examples, read the study guide. Then test yourself with the practice questions. Also see the Edexcel A Level Economics hub, the printable checklist and the free diagnostics. All figures here are invented for illustration.

Definitions to know cold

Term	Meaning
Absolute poverty	Income or consumption below a fixed level needed for basic needs; the line is fixed in real terms
Relative poverty	Income far below the typical income in the same society; the line moves with the median
Headcount ratio	People below the line as a percentage of the population
Poverty gap	Average shortfall of the poor below the line
Income	A flow of earnings over a period
Wealth	A stock of assets less debts
Lorenz curve	Cumulative share of income against cumulative share of households, poorest first
Gini coefficient	A / (A + B); 0 is perfect equality, 1 is total inequality
Poverty trap	Weak incentive to earn more because benefits are withdrawn and tax is paid

1 Poverty: measures and method (outcomes 1a, 1b)

Absolute measures: headcount ratio, poverty gap, an international dollars-a-day line, multidimensional indices (health, education, living standards). Relative measures: share below a set fraction of median income (60% is a common choice), and ratios such as the top 10% to the bottom 10%.

Method: headcount ratio and poverty gap

1. Count households below the line.
2. Headcount = poor / total x 100.
3. Gap for each poor household = line - income.
4. Average gap among the poor = total gap / number of poor.

Reminder: Country Delta has 40 million people and 6 million are poor. Headcount = 6 / 40 = 15%.

Method: relative line

1. Find the median income.
2. Multiply by the chosen fraction.
3. Compare each household with the new line each year.

Reminder: Median 1,800, 60% line = 1,080. A household on 700 is 380 below and a household on 900 is 180 below. Total gap 560, average 280.

Must-know distinction: absolute poverty can fall while relative poverty rises, because the relative line moves up with the median. Real values matter for absolute lines: nominal income of 2,090 after a 10% rise in prices is worth 2,090 / 1.10 = 1,900 at old prices, a fall of 100 on a base of 2,000.

2 Causes of changes in poverty (outcome 1c)

Cause	Chain of reasoning	Evaluation point
Economic growth	Higher output, more jobs, more income and tax	Depends on who gains; check the distribution
Education and training	Skills, productivity, wages	Long lag; the poorest may drop out
Welfare benefits	Direct income, smaller gap	Poverty trap; fiscal cost
Tax structure	Progressive taxes help; regressive indirect taxes hurt	Depends on the mix of taxes
Structural change	Jobs shift from low to high productivity	Structural unemployment; regional decline
Aid	Funds schools, health, infrastructure	Tied aid, corruption, dependency
Conflict	Destroys capital, displaces people, deters investment	Poverty can persist after peace

Worked reminder: poverty trap. A worker earns 50 more, loses 30 in benefits and pays 10 in tax. Keeps 10. The effective marginal tax rate is (30 + 10) / 50 = 80%.

Worked reminder: growth and poverty. Mean income grows 5% and the headcount falls from 30% to 27%. That is a change of -10%, so the response is -10 / 5 = -2.0.

Worked reminder: regressive indirect tax. A 20% sales tax on spending. A household on 8,000 spending all of it pays 1,600, or 20% of income. A household on 80,000 spending 40% pays 6,400, or 8% of income. The poorer household bears the heavier burden.

3 Inequality: wealth, income, measurement (outcomes 2a, 2b)

• Wealth is a stock; income is a flow.
• Wealth is usually more unequal than income because it builds up and is inherited.
• Wealth earns income, so wealth gaps feed income gaps.

Method: Gini from grouped data

1. Write the cumulative shares of income, starting at 0.
2. Find each trapezium: width of group x average of its two cumulative shares.
3. Add them to get B, the area under the Lorenz curve.
4. Gini = 1 - 2B.

Reminder: Country Z has income shares by fifth of 4, 10, 16, 24, 46 per cent.

• Cumulative: 0, 4, 14, 30, 54, 100.
• B = 0.2 x (0.02 + 0.09 + 0.22 + 0.42 + 0.77) = 0.2 x 1.52 = 0.304.
• Gini = 1 - 0.608 = 0.392.

Country W has shares 7, 11, 16, 22, 44, cumulative 7, 18, 34, 56, 100, B = 0.330 and a Gini of 0.340. W is more equal than Z.

Reading the diagram. The curve starts at the origin and ends at 100% on both axes. A curve closer to the 45-degree line means less inequality. A curve that moves towards the line after taxes and benefits shows redistribution.

Limits: grouped data hide the top; two curves that cross can share a Gini; no information about absolute living standards; it depends on whether income is measured before or after tax.

4 Causes of inequality (outcome 2c)

Within countries: skills and education gaps, discrimination, ownership of assets and inheritance, market power, unemployment and low-wage work, tax and benefit design, regional differences, technology favouring skills.

Between countries: capital, human capital, technology, institutions, reliance on a few primary exports, conflict and weak governance, market access, debt, health and population growth.

Worked reminder: gaps. Country R has income per head of 12,000 and Country S has 600, a ratio of 20. R grows 1% and S grows 5%.

• R: 12,120. S: 630.
• Ratio: 12,120 / 630 = 19.2, so the ratio narrows.
• Absolute gap: 11,400 rises to 11,490, so it widens.

5 Impact of inequality (outcome 2d)

Area	Effect that may be positive	Effect that may be negative
Enterprise	Rewards risk-taking	Poor face credit barriers; weak demand
Incentives	Pay rewards effort and skills	Extreme gaps demotivate; benefit withdrawal blunts effort
Savings	Rich save more, funding investment	Weak consumer demand can slow growth
Education	Returns to schooling motivate study	Poor families cannot afford it; waste of talent
Migration	Remittances; skilled workers fill gaps	Brain drain from poor areas
Life expectancy	None	Poorer nutrition, housing and care shorten lives

6 Economic change, development and capitalism (outcomes 2e, 2f)

• Kuznets hypothesis: inequality may rise in early development, then fall. It is a pattern, not a law.
• Globalisation and technology can widen skill premiums, yet trade can also create jobs.
• Free market capitalism rewards productivity and risk. It can drive growth but does not redistribute.
• Intervention (taxes, transfers, public services) trades equity against efficiency. Judge by size, time frame and design.

Evaluation checklist: short run or long run, size of the effect, who gains, quality of data, other policies in place.

Quick self-test

1. State one difference between absolute and relative poverty.
2. A country has 25 poor people in a sample of 250. Calculate the headcount ratio.
3. Median income is 1,800. Find the 60% line.
4. Why can relative poverty rise when all incomes rise?
5. Shares by fifth are 6, 10, 16, 24, 44. State the cumulative share held by the poorest 60%.
6. A worker earns 50 more, loses 25 in benefits and pays 15 in tax. Calculate the effective marginal tax rate.
7. State whether wealth is a stock or a flow.
8. Mean income rises 4% and the poverty rate falls from 25% to 23%. Calculate the percentage change in the poverty rate.
9. Name one cause of inequality between countries.
10. Give one reason why inequality may raise national saving.

Answers

1. The absolute line is fixed in real terms; the relative line moves with median income.
2. 25 / 250 = 10%.
3. 0.6 x 1,800 = 1,080.
4. The median rises, so the line rises; households whose income grows more slowly fall below it.
5. 6 + 10 + 16 = 32%.
6. (25 + 15) / 50 = 80%.
7. A stock.
8. (23 - 25) / 25 = -8%.
9. For example: differences in capital and technology, or reliance on a few primary exports.
10. The rich have a higher marginal propensity to save, so more income in their hands raises saving.

Where marks are usually lost

• Using only the headcount ratio and ignoring the depth of poverty.
• Treating a fall in absolute poverty as a fall in relative poverty.
• Starting a Lorenz curve away from the origin or labelling axes wrongly.
• Misreading a high Gini as high equality.
• Not stating which gap, ratio or absolute, you are describing.
• Listing causes without a chain of reasoning.
• Giving effects of inequality in one direction only.
• Concluding with a bare assertion rather than a judgement based on size, time and context.

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.