IB DP Economics: Inequality and poverty – Revision Notes

These notes follow the IB Diploma Programme Economics guide (first assessment 2022, published February 2020), the course examined from the 2022 session onwards. They cover sub-topic 3.4, the economics of inequality and poverty, for SL and HL. Items marked HL only are the Lorenz construction from quintile data and the two tax calculations. All data are invented.

For full explanations, read the study guide. Then test yourself with the practice set. The IB DP Economics hub and the printable checklist show where 3.4 sits in the course, and the free diagnostics show what to revise first. Related units: fiscal policy and the market’s inability to achieve equity.

Key definitions

Term	Meaning
Equality	Similar economic outcomes for different people or groups
Equity	Fairness; a normative idea, so views differ
Income inequality	Unequal distribution of the flow of earnings and transfers
Wealth inequality	Unequal distribution of the stock of assets less debts
Absolute poverty	Income or consumption below a fixed standard for basic needs
Relative poverty	Far less than others in the same society, often below a share of median income
Minimum income standard	Income needed to buy a basket of goods judged necessary
MPI	Composite index of deprivation in health, education and living standards
Progressive tax	Average tax rate rises with income
Regressive tax	Average tax rate falls as income rises
Proportional tax	Average tax rate is constant
Direct tax	Charged on income or wealth, paid by the person it falls on
Indirect tax	Charged on spending, collected by sellers

Lorenz curve and Gini coefficient

• Axes: cumulative % of households (poorest first) across; cumulative % of income up.
• Line of equality: 45-degree line. The Lorenz curve lies below it.
• Curve moves toward the line: inequality falls. Curve moves away: inequality rises.
• Gini = area between line and curve ÷ area under the line. Range 0 to 1 (or 0 to 100).
• Crossing curves cannot be ranked by eye, and the same Gini can come from different shapes.

HL only: construct from quintile data

1. Write the quintile shares, poorest first, and check they total 100.
2. Add them cumulatively.
3. Pair each total with 20, 40, 60, 80, 100 on the horizontal axis.
4. Add the point (0, 0) and the line of equality.
5. Plot and join with straight lines or a smooth curve.

Reminder (Marenta, invented): shares 7, 11, 16, 22, 44 give cumulative 7, 18, 34, 56, 100. The poorest 60% hold 34%, against 60% on the line of equality. The richest 20% hold 44%.

Poverty

Idea	Absolute	Relative
Standard	Fixed level for basic needs	Moves with the typical income
Falls when	Real incomes rise above the line	Gaps to the median narrow
Can rise when	Prices of necessities jump	Median rises faster than the poorest incomes

Measures

• Single indicators: international poverty lines; minimum income standards.
• Composite: Multidimensional Poverty Index (MPI), which covers health, education and living standards, not income alone.

Difficulties: arbitrary thresholds; regional price and household-size differences; informal and unpaid work; unseen sharing inside households; infrequent surveys; comparing countries.

Causes: the guide’s eight

1. Inequality of opportunity
2. Different levels of resource ownership
3. Different levels of human capital
4. Discrimination (gender, race and others)
5. Unequal status and power
6. Government tax and benefits policies
7. Globalisation and technological change
8. Market-based supply-side policies

For each, write one link in the chain: cause, then mechanism, then effect on incomes. “Low skills” is a label; “low skills mean low productivity, so low wages” is an explanation.

Impact of inequality

On	Can be harmful because	May be defended because
Economic growth	Poor households underinvest in education and health; demand weakens	Pay differences reward effort; richer households save and invest
Standards of living	The average hides the poorest’s position; deprivation harms health	Higher top incomes can lift the average
Social stability	Resentment, crime, political tension	Mobility can ease tension

Taxation

Formulas

Quantity	Formula
Average tax rate	total tax ÷ income × 100
Marginal tax rate	change in tax ÷ change in income × 100
Indirect tax paid	tax rate × amount of taxed spending

Under a progressive income tax the marginal rate is above the average rate.

HL only: method for total tax and average rate

1. Split income into the tax bands.
2. Multiply the income inside each band by that band’s rate.
3. Add the band amounts to get total tax.
4. Divide total tax by total income and multiply by 100.
5. Compare the average rates at different incomes. A rising rate means progressive.

Worked reminder (invented): Marenta exempts the first 8,000, taxes 8,000 to 24,000 at 25%, and taxes income above 24,000 at 35%. For 40,000: 16,000 x 0.25 = 4,000, and 16,000 x 0.35 = 5,600. Total 9,600, average rate 24.0%. For 16,000: 8,000 x 0.25 = 2,000, average rate 12.5%.

HL only: indirect tax paid

A 10% sales tax on 6,200 of taxed spending: 6,200 x 0.10 = 620.

Must-know distinctions

• Equality vs equity: equality is about outcomes being similar; equity is about fairness, which is a value judgement.
• Average vs marginal tax rate: average is total tax over income; marginal is the rate on the next unit earned.
• Rate vs effect: a proportional indirect tax rate can still take a larger share of a poor household’s income if poorer households spend more of their income.
• Poverty vs inequality: poverty is about falling below a threshold; inequality is about the whole spread of the distribution. Poverty can fall while inequality rises.
• Targeted vs universal: targeted support goes only to defined groups; universal support goes to everyone.

Evaluating a policy: checklist

1. Who gains, and how much?
2. Who pays, and does it change incentives to work, save or invest?
3. How fast does it work, and how long does it last?
4. What does it cost, and what is given up?
5. Does it tackle a cause or only a symptom?
6. Your judgement, with the condition it depends on.

Further policies at a glance

Policy	Main strength	Main weakness
Human capital investment	Tackles causes; raises productivity	Slow; costs now
Transfer payments	Quick income boost	Cost; possible work disincentive when means-tested
Targeted spending	Reaches those in need	Administration; missed eligible people
Universal basic income	Simple; no means test	Very expensive
Anti-discrimination policies	Narrow pay gaps	Enforcement; slow
Minimum wages	Raises low pay	May reduce jobs if set too high

Quick self-test

1. Distinguish income inequality from wealth inequality.
2. Marenta’s quintile shares are 7, 11, 16, 22 and 44. State the cumulative share held by the poorest 60%. (HL only)
3. A Lorenz curve moves toward the line of equality. What has happened to inequality?
4. A country sets its relative poverty line at 60% of median income. The median is 20,000. Find the line.
5. A tax takes 800 from an income of 10,000 and 2,500 from an income of 50,000. Classify it and explain.
6. Marenta’s rules: first 8,000 exempt, 25% on 8,000 to 24,000, 35% above. Find total tax and the average rate on 16,000. (HL only)
7. Using the same rules, find the average rate on 40,000 and say what the pattern shows. (HL only)
8. A 10% sales tax applies to 6,200 of spending. How much tax is paid? (HL only)
9. Name the three areas of deprivation the MPI covers.
10. Give one strength and one weakness of universal basic income.
11. Why might a minimum wage fail to help some low-income households?

Answers

1. Income inequality concerns the flow of earnings and transfers over a period. Wealth inequality concerns the stock of assets less debts at a point in time.
2. Cumulative shares are 7, 18, 34, 56, 100, so the poorest 60% hold 34%.
3. Inequality has fallen.
4. 0.60 x 20,000 = 12,000.
5. Average rates are 800 ÷ 10,000 = 8% and 2,500 ÷ 50,000 = 5%. The rate falls as income rises, so the tax is regressive.
6. 8,000 x 0.25 = 2,000, so total tax is 2,000 and the average rate is 2,000 ÷ 16,000 = 12.5%.
7. Tax is 4,000 + 5,600 = 9,600, so the average rate is 9,600 ÷ 40,000 = 24.0%. It is higher than 12.5%, so the income tax is progressive.
8. 6,200 x 0.10 = 620.
9. Health, education and living standards.
10. Strength: simple, no means test. Weakness: very expensive, so it needs high taxes or cuts elsewhere.
11. If the wage is set above the market level, some employers cut jobs or hours, so some workers lose income.

Where marks are usually lost

• Labelling Lorenz axes as “income” and “population” instead of cumulative percentages.
• Drawing a Lorenz curve above the line of equality, or one that does not reach (100, 100).
• Stating “relative poverty means being poor in relation to others” with no reference to a median or typical income.
• Writing that a progressive tax means the rich pay more in total, rather than a higher share.
• Using the marginal rate as if it were the average rate in a calculation.
• Skipping working in a “calculate” question; the glossary says to show the relevant stages.
• Listing causes or policies with no mechanism and no evaluation.
• Giving a one-sided account of the effects of inequality when the question asks for judgement.

Official syllabus

IB Diploma Programme Economics guide, first assessment 2022, published by the International Baccalaureate Organization (February 2020). This page covers sub-topic 3.4.