OCR A Level Economics: Income and wealth distribution, poverty and UK trends (H460) – Revision Notes

These notes condense the topics “Income distribution and welfare” and “Trends in macroeconomic indicators” from Component 2, Macroeconomics, of the OCR A Level Economics (H460) specification, Version 3.0 (June 2026), for first assessment in 2021. All of it is A Level. For full explanations read the study guide, then try the practice questions. See the OCR Economics hub, the printable checklist and the free 10-minute diagnostics. Related page: economic growth, GDP and recession. Figures are invented and illustrative unless stated as real-world facts.

Key definitions

Term	Meaning
Income	A flow received over a period: wages, profit, rent, interest, dividends, benefits
Wealth	A stock of assets owned at a moment, less debts
Distribution	How the total is divided among households
Inequality	The size of the gaps between shares
Lorenz curve	Cumulative % of income or wealth against cumulative % of households, poorest first
Gini coefficient	Area between the diagonal and the Lorenz curve divided by the area under the diagonal; 0 equal, 1 one household owns all
Quantile	One of equal-sized groups of a ranked population: quintile (fifth), decile (tenth), percentile
Absolute poverty	Income below a fixed real level for basic needs
Relative poverty	Income well below a typical level, such as under 60% of median income

Method: from quantile shares to a Gini

1. Write the shares from poorest to richest and form cumulative totals, starting at 0.
2. For each strip, average the two cumulative heights: (left + right) / 2.
3. Add the five averages, multiply by the strip width (0.2 for quintiles) and divide by 100. This is the area under the Lorenz curve.
4. Gini = 1 - 2 x area.

Worked reminder (invented Country R). Shares 4, 11, 17, 24, 44 give cumulative 0, 4, 15, 32, 56, 100. Strip averages: 2, 9.5, 23.5, 44, 78; total 157. Area = 157 x 0.2 / 100 = 0.314. Gini = 1 - 0.628 = 0.372. Quintile ratio = 44/4 = 11. The poorest 60% hold 32%.

Straight-line segments slightly understate the true Gini, so state it as approximate. The specification asks you to explain and interpret Gini coefficients and quantiles, so be ready to read a given value as well.

Reading a Lorenz curve

• The diagonal is perfect equality. The further the curve bows from it, the greater the inequality.
• A curve closer to the diagonal than before shows a more equal distribution.
• Curves that cross cannot be ranked by sight, and they can share a Gini.
• Wealth curves usually bow further than income curves.
• Compare before and after tax and benefits to show what redistribution achieves.

Distinctions to know

Pair	Key difference
Income and wealth	Flow and stock; a retired owner may be income-poor and wealth-rich
Inequality and poverty	Inequality is about gaps; poverty is about falling below a line
Absolute and relative poverty	Fixed real line and a line that moves with the median
Equality and equity	Same shares and fair shares, which is a value judgement
Mean and median	The mean is pulled up by high incomes; the median is the middle household
Level and rate of growth	A catch-up economy can grow faster and still be poorer

Why more equal may be an objective

• Less poverty and better basic living standards.
• Higher consumption if poorer households spend a larger share of extra income.
• More human capital and productivity.
• Greater cohesion, mobility and political stability.
• Judged fairer by many people.

Against: weaker incentives to work, save and invest if marginal tax rates are high; administrative cost; slower growth if poorly designed. Judgement: depends on how the change is made, its size, the time period and the value judgement behind it.

Causes in one list

Income inequality	Wealth inequality
Skills and education	Inheritance and gifts
Discrimination, bargaining power	Saving and compounding
Unemployment and part-time work	Age and life stage
Ownership of income-earning assets	Asset price rises
Technology, globalisation	Income inequality itself
Taxes, benefits, minimum wage	Tax treatment of wealth

Poverty causes add ill health, caring duties, regional job shortages and the poverty trap.

Worked reminder: poverty trap. An extra 80 gross earnings costs 40 of benefits and 12 of tax and national insurance. Net gain = 80 - 40 - 12 = 28. Effective marginal rate = 52/80 = 65%.

Absolute and relative poverty: method

1. Fix the absolute line in real terms. If prices rise 5%, an 8,000 line becomes 8,000 x 1.05 = 8,400 in money terms.
2. Relative line = 60% of median income. With a median of 22,000: 0.6 x 22,000 = 13,200.
3. Count households under each line.

If all real incomes rise by the same percentage, absolute poverty can fall while relative poverty stays put.

Consequences: chains

• Poverty: poor health, lower attainment, lower productivity, higher public spending, lower mobility.
• Inequality: weaker demand if the poor cannot spend, social tension, political influence of the wealthy, wasted talent.
• Benefits of some inequality: reward for effort, risk and skill.
• Evaluate by degree, time period, the policy used and whether you refer to poverty or inequality.

UK trends over 20 years (broad patterns; check the latest ONS data)

Indicator	Pattern
Output	Growth to 2008; deep recession 2008-09; slow recovery; sharp fall in 2020, then a rebound
Productivity	Slow growth after 2008, the productivity puzzle
Inflation	Around the Bank of England’s 2% CPI target for most of the period; above 10% in late 2022
Unemployment	Rose after 2008; fell to historically low levels before the pandemic
Bank Rate	0.5% from March 2009; 0.1% from March 2020; above 5% in 2023
Public finances	Large deficits after 2008 and 2020; spending restraint from 2010
External	Persistent current account deficit; sterling fell after the 2016 referendum

Worked reminder. A 6% fall in real GDP needs a 100/94 - 1 = 6.4% rise to recover. Nominal wages up 2.5% with prices up 3.5% gives real wages of 1.025/1.035 - 1 = -0.97%.

Comparing the UK with other economies

• Developed: high income per head, slower growth. Emerging: fast growth from a lower base. Developing: low incomes, informal work.
• Compare several indicators, not one: growth, income per head, inflation, unemployment, debt, external balance and inequality.
• Catch-up: 30,000 growing 1% and 5,000 growing 7% for 10 years gives 33,139 and 9,836. The ratio falls from 6.0 to 3.4, and the money gap narrows from 25,000 to 23,303.
• Limits: different definitions, informal economies, exchange rates and price levels, year chosen.

Quick self-test

1. Define wealth.
2. Five incomes (thousands) are 10, 12, 15, 18 and 60. Find the mean and the median.
3. Cumulative shares are 4, 15, 32, 56, 100. What does the second value show?
4. Top fifth 44%, bottom fifth 4%. Find the quintile ratio.
5. Median income is 22,000. State the relative poverty line at 60%.
6. A fixed 8,000 line and 5% inflation: what is the new money line?
7. Extra gross pay 80, benefits lost 40, tax 12. Find the effective marginal rate.
8. Move 200m from MPC 0.25 households to MPC 0.75 households. Find the net change in consumption.
9. Name two causes of wealth inequality.
10. Why can a country growing at 7% still be poorer than one growing at 1%?

Answers

1. A stock of assets owned at a moment, less debts.
2. Mean = 115/5 = 23; median = 15.
3. The poorest 40% receive 15% of the total.
4. 44/4 = 11.
5. 0.6 x 22,000 = 13,200.
6. 8,400.
7. 52/80 = 65%.
8. -50 + 150 = +100m.
9. For example inheritance and compounding of savings.
10. Catch-up growth from a low base: the level of income per head may still be far below.

Using the topic in Component 2

The specification describes Component 2 as a data response question and two higher tariff questions, with the Component 2 content tested entirely on macroeconomics. At least 20% of the overall A Level marks target quantitative skills, so expect to calculate a percentage change, read a table or interpret a quantile figure, then use it in an argument.

Evaluation prompts that suit this topic:

• Measure. Which measure was used (Gini, quintile ratio, a poverty line), and what does it leave out?
• Time. Does the gap narrow in the short run and widen in the long run?
• Size. How large is the inequality or the poverty, and for whom?
• Policy. Does the policy used to narrow the gap damage incentives?
• Value judgement. Which view of fairness supports your conclusion?

Structure for a chain: cause, mechanism, effect on a named indicator, then a counter-point with a reason, then a judgement that says what it depends on.

Where marks are usually lost

• Defining wealth as a flow or income as a stock.
• Describing a Lorenz curve without using the diagonal as a reference.
• Reading a falling Gini as higher living standards.
• Treating relative poverty as the same as absolute poverty.
• Listing consequences with no chain from cause to effect.
• Evaluation that never mentions time period, degree or value judgement.
• UK trends stated with no year, no cause and no consequence.
• Comparing countries on growth alone.

Official syllabus

OCR, A Level in Economics (H460) specification, Version 3.0 (June 2026), for first assessment in 2021: Component 2, topics “Income distribution and welfare” and “Trends in macroeconomic indicators”.