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

This guide covers two topics from the area of study “Economic policy objectives and indicators of macroeconomic performance” in Component 2, Macroeconomics, of the OCR A Level Economics (H460) specification, Version 3.0 (June 2026), for first assessment in 2021. They are “Income distribution and welfare” and “Trends in macroeconomic indicators”. The specification labels no content as AS or extension: all of it is A Level. Growth, development, unemployment and inflation have their own pages. Figures are invented and illustrative unless stated as real-world facts.

Companion pages: the revision notes and the practice questions. Also see the OCR Economics hub, the printable checklist, the free 10-minute diagnostics and the Macroeconomics overview.

What this unit covers

Outcome	Section
Income and wealth distribution and inequality	1
Why a more even distribution may be an objective	2
Lorenz curve	3
Gini coefficients and quantiles	4
Causes of inequality	5
Absolute and relative poverty	6
Causes and consequences of poverty and inequality	7
UK trends over 20 years	8
UK against developed, emerging and developing economies	9

1. Income and wealth: distribution and inequality

Income is a flow received over a period: wages, profit, rent, interest, dividends and benefits. Wealth is a stock of assets owned at a moment, less debts: property, savings, shares, pension rights.

The distribution of income or wealth describes how the total is divided among households. Inequality is the gap between the shares. Calling inequality large or unfair is a value judgement.

Worked example. Household P has a home worth 210,000 with a mortgage of 140,000, savings of 6,500 and pension rights of 27,500. Its income is 26,000 a year.

Net wealth = 210,000 - 140,000 + 6,500 + 27,500 = 104,000, which is 104,000 / 26,000 = 4 times annual income.

Household Q is retired: income 14,000, a home worth 320,000 with no mortgage, and savings of 45,000. Net wealth = 365,000, or about 26.1 times income.

Q is income-poor but wealth-rich. Wealth is usually spread less evenly than income because it accumulates and passes between generations.

2. Why a more even distribution may be an objective

Arguments for:

• Poverty reduction: a fairer split raises basic living standards.
• Aggregate demand: poorer households spend a larger share of extra income.
• Human capital: poor households may underinvest in education and health.
• Social cohesion: large gaps may raise crime and weaken trust.
• Equity: many people judge a fairer split to be desirable in itself.

Worked example. The government taxes 500m from high-income households whose marginal propensity to consume is 0.2 and passes it to low-income households whose propensity is 0.8.

Consumption falls by 0.2 x 500 = 100m and rises by 0.8 x 500 = 400m. Net change = +300m, before any multiplier effect.

Against, and evaluation:

• High marginal tax rates may weaken incentives to work, save and invest.
• The effect on growth depends on how redistribution is done (taxing wealth versus funding education) and on the time period.
• Which distribution counts as fair is normative, so state the value judgement behind your conclusion.

3. The Lorenz curve

A Lorenz curve has the running total of income (or wealth), as a percentage, up the vertical axis. Along the horizontal axis households are lined up from poorest to richest. The line of perfect equality runs diagonally from the origin to the point (100, 100): the poorest 20% receive 20%, the poorest 60% receive 60%. The Lorenz curve bows below it. The further it bows, the more unequal the distribution.

Worked example. Country A’s household shares (invented), by fifth from poorest to richest:

Fifth	Income share before tax and benefits (%)	Cumulative (%)	Share after (%)	Cumulative (%)	Wealth share (%)	Cumulative (%)
Poorest	5	5	8	8	1	1
Second	10	15	13	21	3	4
Third	15	30	17	38	7	11
Fourth	22	52	22	60	16	27
Richest	48	100	40	100	73	100

Sketch it with both axes running 0 to 100. The two income curves sag below the diagonal and end at (100, 100); the after-tax curve is nearer the diagonal. The wealth curve sags furthest.

Reading it: the poorest 40% receive 15% of income before taxes and benefits and 21% after, but own only 4% of wealth. Taxes and benefits made income more equal; wealth is the most unequal. A curve moving towards the diagonal shows inequality falling. If two curves cross, the picture alone cannot rank them.

4. Gini coefficients and quantiles

The Gini coefficient is the gap between the diagonal and the Lorenz curve, measured as a fraction of the whole triangle under the diagonal. A value of 0 means everyone has the same; a value of 1 means a single household has the lot. Be ready to explain and interpret it.

Worked example. Area under each section of the Lorenz curve, using the cumulative heights and strip width 0.2:

Before: (0+5)/2 + (5+15)/2 + (15+30)/2 + (30+52)/2 + (52+100)/2 = 2.5 + 10 + 22.5 + 41 + 76 = 152. Area = 152 x 0.2 / 100 = 0.304. Gini = 1 - 2 x 0.304 = 0.392.

After: (0+8)/2 + (8+21)/2 + (21+38)/2 + (38+60)/2 + (60+100)/2 = 4 + 14.5 + 29.5 + 49 + 80 = 177. Area = 0.354. Gini = 0.292.

Taxes and benefits cut the Gini by 0.10, a fall of 0.10 / 0.392 = 25.5%. Wealth gives 0.628. These are approximations, because straight lines between points slightly understate the true value.

Quantiles split a ranked population into equal groups: quintiles (fifths), deciles (tenths), percentiles. Useful measures:

• Quintile ratio: top fifth’s share divided by the bottom fifth’s. Before tax: 48/5 = 9.6; after: 40/8 = 5.
• Percentile ratio: the 90th percentile income divided by the 10th. For 58,000 and 12,500 it is 4.64.
• Mean versus median. Ten households in Country B have annual incomes (thousands) of 9, 11, 14, 17, 20, 24, 29, 36, 48 and 112. Total = 320, mean = 32, median = (20 + 24) / 2 = 22. The top income (35% of the total) pulls the mean above the median, which describes a typical household better.

Limitations. One number hides the shape: curves that cross can share a Gini. The unit (individuals or households) and whether income is before or after tax matter. A low Gini says nothing about the level of income.

5. Causes of income and wealth inequality

Income.

• Differences in skills, education and experience, and in supply and demand for each type of labour.
• Discrimination, bargaining power and trade union reach.
• Unemployment, inactivity, part-time work and the number of earners in a household.
• Returns on assets (rent, interest, dividends) accrue to owners.
• Technology and globalisation may raise skilled pay and cut demand for routine jobs.
• Taxes, benefits and the minimum wage.

Wealth.

• Inheritance and gifts.
• Higher earners save more, and savings compound.
• Age: assets build up over a working life.
• Asset price rises (such as property) favour owners.

Worked example. Household X inherits 100,000 and earns 4% a year for 25 years: 100,000 x 1.04^25 = 266,584. Household Y saves 3,000 a year for 25 years at 4%: 3,000 x (1.04^25 - 1) / 0.04 = 124,938. X ends with over twice as much, though Y paid in 75,000.

6. Absolute and relative poverty

Absolute poverty means income below a fixed level needed for basic needs (food, shelter, clothing, heating). The line is held fixed in real terms.

Relative poverty means income well below a typical level, such as below 60% of the median income, a common convention. The line moves with the median.

Worked example. Ten households have real incomes (thousands): 6, 8, 11, 15, 18, 22, 26, 30, 38 and 60. The absolute line is 9. The median is (18 + 22) / 2 = 20, so the relative line is 60% x 20 = 12.

• Absolute poverty: 6 and 8 are below 9, so 2 households.
• Relative poverty: 6, 8 and 11 are below 12, so 3 households.

Real incomes then rise 15% for every household. The absolute line stays 9: only 6.9 is below it, so 1 household. The median becomes 23 and the relative line 13.8: 6.9, 9.2 and 12.65 are below it, so 3 households.

Absolute poverty fell while relative poverty did not. Relative poverty tracks inequality at the bottom; absolute poverty tracks living standards. Neither shows how far below the line people fall.

7. Causes and consequences of poverty and inequality

Causes of poverty overlap with the causes above: unemployment, low pay, low skills, ill health, caring responsibilities, discrimination and regional job shortages.

Poverty trap. Benefits withdrawn as earnings rise can make work barely pay. Suppose a worker earns an extra 100. Benefits fall by 55 and tax and national insurance take 20. Net gain = 100 - 55 - 20 = 25, an effective marginal rate of 75%. The weak incentive can lock people into low income.

Consequences.

• Individuals: worse health, lower attainment, lower life expectancy.
• Economy: wasted human capital, lower productivity and potential output, higher public spending on health and benefits.
• Society: lower social mobility, crime, weaker cohesion.
• Possible benefit of some inequality: rewards encourage enterprise.

Evaluation chain. Low incomes limit investment in education, which lowers future earnings and passes poverty on. The strength depends on the size of the gap, access to free schooling and mobility. Say whether you mean inequality or poverty: inequality can rise while poverty falls.

8. Key trends in UK macroeconomic performance over 20 years

Check the latest Office for National Statistics (ONS) figures before the exam. These are broad patterns, not data.

• Growth. Output grew until 2008, then a deep recession in 2008-09 and a slow recovery. Output fell sharply in 2020 during the pandemic and rebounded.
• Productivity. Output per worker grew slowly after 2008 (the productivity puzzle), limiting real earnings growth.
• Inflation. The Bank of England has a 2% CPI target. Inflation was mostly near it until 2021, then rose above 10% in late 2022 before falling back.
• Unemployment. Up after 2008, then down over the 2010s to historically low levels before the pandemic.
• Interest rates. Bank Rate was cut to 0.5% in March 2009, to 0.1% in March 2020, and raised from late 2021 to above 5% in 2023.
• Public finances. Large deficits after 2008 and 2020, with spending restraint from 2010.
• External position. A persistent current account deficit; sterling fell after the 2016 EU referendum.

Worked example (invented Country K). Real GDP falls from 100 to 94. To return to 100 it must rise by 100/94 - 1 = 6.4%, more than the 6% fall. If nominal wages rise 3% while prices rise 4%, real wages change by 1.03/1.04 - 1 = -0.96%.

To explain a trend, name it, give a cause, and give a consequence.

9. UK performance against other economies

Use several indicators together:

• Developed economies: high income per head, slower growth.
• Emerging economies: faster growth, rising incomes.
• Developing economies: low income per head, often a large informal sector.

Worked example (invented). Country D (developed) has GDP per head 40,000 growing at 1.5% a year. Country E (emerging) has 8,000 growing at 6%.

After 20 years, D = 40,000 x 1.015^20 = 53,874 and E = 8,000 x 1.06^20 = 25,657. The ratio of D to E falls from 5.0 to 2.1, and the gap from 32,000 to 28,217. E grows faster in percentage terms from a low base, which is catch-up growth.

To evaluate, compare growth, inflation, unemployment, debt, the external balance and inequality. Note that:

• Levels and rates answer different questions.
• Unemployment definitions and informal work differ between countries.
• One recession year distorts an average.
• Exchange rates and price levels affect GDP per head comparisons.

Use the latest ONS, OECD, IMF and World Bank releases.

Common errors

• Reading a lower Gini as higher living standards.
• Treating relative poverty as absolute poverty.
• Assuming redistribution always lowers growth.
• Quoting UK figures without a year.
• Judging performance on one indicator.

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”.