OCR GCSE Economics: Distribution of income and wealth, inflation and price stability (J205) – Revision Notes

Condensed notes for the final weeks on sections 3.3 and 3.4 of the OCR GCSE (9-1) Economics specification (J205, Version 2.0, June 2026). For full explanations use the study guide, then test yourself with the practice questions. Course pages: hub, checklist, free diagnostics. All figures are invented.

Definitions to recall

Term	Meaning
Income	Money received over a period (a flow)
Wealth	Value of assets owned less liabilities owed, at a moment (a stock)
Gross pay	Pay before deductions
Net pay	Pay after income tax and other deductions
Transfer payment	Benefit or pension paid by government with no output in return
Distribution of income	How total income is shared among households
Inflation	A continuing rise in the average level of prices
Price stability	Low and steady inflation
Deflation	A sustained fall in the general price level
Nominal value	Measured in current money, not adjusted for prices
Real value	Adjusted for inflation, showing purchasing power
CPI	Consumer Price Index: a weighted index of a typical household’s spending

Types of income

• Wages and salaries (labour)
• Interest (savings, lending)
• Rent (land, property)
• Profit and dividends (enterprise, share ownership)
• Benefits and pensions (government transfers)

Formulae and methods

Task	Method
Net pay	Gross pay − tax − other deductions
Net wealth	Total assets − total liabilities
Percentage change	(new − old) ÷ old × 100
Interest on savings	Balance × interest rate
Share to amount	Share % × total ÷ number of households
Real value	Nominal ÷ price index × 100
Inflation rate	(new index − old index) ÷ old index × 100
New price	Old price × (1 + inflation rate)
Several years	Multiply the growth factors, do not add the percentages
Weighted CPI	Sum of (weight × price index)

Method in steps: CPI

1. List each category’s weight (the weights add to 1 or 100%).
2. Multiply each weight by its price index.
3. Add the results to get the CPI.
4. Compare with the earlier CPI to find the inflation rate.

Worked reminders

Wages in real terms. Pay rises from £2,500 to £2,650 (+6.0%) while prices rise from 100 to 112. Real pay = 2,650 ÷ 112 × 100 = £2,366, a real fall of 5.4% against £2,500. Nominal pay rose and real pay fell.

CPI. Weights 0.40, 0.35, 0.25 with price indices 104, 109, 100: 41.6 + 38.15 + 25.0 = 104.75.

Inequality ratio. If the richest fifth of households receive 44% of income and the poorest fifth 6%, the richest fifth receive 44 ÷ 6 = 7.3 times as much per household (the groups are equal in size).

Savings in real terms. £8,000 earns 2% (£160) while prices rise 3%. The balance is £8,160, and 8,160 ÷ 1.03 = £7,922 in start-of-year prices, so the saver is worse off in real terms even though the nominal balance grew.

Price stability and the CPI in more detail

• Price stability means inflation that is low and steady enough for households and firms to plan, not a freeze on prices.
• The CPI basket is made of goods and services a typical household buys. Weights are shares of spending, so food and housing count for more than occasional purchases.
• The base year is set at 100. A CPI of 112 means the basket costs 12% more than in the base year.
• Limitations: no real household is typical; spending patterns differ by income, age and region; quality improvements are hard to capture; consumers switch products when prices change.

Analysing inflation figures: a checklist

1. Quote the highest and lowest figures and their years.
2. Describe the trend: rising, falling, stable or volatile.
3. Calculate something: an average, a change in percentage points, or the price after several years.
4. Remember that positive inflation means prices are still rising.
5. Suggest a cause (demand-pull, cost-push, imported) and a consequence, and say how confident you are.

Causes of unequal income and wealth

• Differences in education, skills and training
• Occupation and sector pay
• Unemployment, part-time work and hours
• Ownership of property and shares (assets earn more income)
• Inheritance and gifts
• Age, region and discrimination
• Taxes, benefits and the minimum wage

Consequences of inequality

Effect	Chain
Poverty	Low income, so poorer housing, health and education
Lower spending	Poorer households spend most of extra income, so very uneven income can weaken demand
Government finances	More benefits paid, less tax collected
Social divides	Tension, loss of trust
Incentives	Some gap rewards skill and effort; too much redistribution may weaken it

Evaluate with: how big the gap is, whether it is widening, whether people can move up, which groups are hit, and the short run against the long run.

Causes of inflation

• Demand-pull: spending grows faster than output (confidence, low interest rates, tax cuts, government spending, exports).
• Cost-push: higher wages, raw materials, energy or indirect taxes passed on in prices.
• Imported inflation: weaker currency makes imports dearer.
• Expectations: people ask for higher pay because they expect higher prices.

Consequences of inflation

Group	Effects
Consumers	Purchasing power falls if pay lags; fixed incomes suffer; borrowers gain
Producers	Higher costs, menu costs, uncertainty; may raise prices; weaker competitiveness if inflation is higher than abroad
Savers	Lose out when the interest rate is below inflation
Government	Tax revenue rises, spending rises, real value of debt falls; may raise interest rates

Evaluate with: size of the rise, expected or surprise, whether pay keeps pace, how long it lasts, and who you are talking about.

Command words in this topic

The specification lists these command words: state, give an example, explain, calculate, draw, analyse and evaluate.

• State and give an example: short, correct knowledge.
• Explain: give a reason and develop it step by step.
• Calculate: show working and units.
• Analyse: use figures or context and follow a chain of reasoning.
• Evaluate: weigh up both sides, then reach a supported judgement.

Must-know distinctions

• Income is a flow; wealth is a stock.
• Gross pay is before deductions; net pay is after.
• Nominal is today’s money; real is adjusted for prices.
• Inflation falling means prices rise more slowly, not that they fall.
• Demand-pull starts with spending; cost-push starts with costs.
• A nominal rise is not a real rise if prices rise faster.

Quick self-test

1. A worker earns £1,850 gross a month and pays £210 income tax and £75 in other deductions. What is net pay?
2. A person owns property worth £95,000, savings of £3,500 and shares worth £2,000, and owes £60,000 on a loan and £800 on an overdraft. Calculate net wealth.
3. Weekly income rises from £480 to £516. Calculate the percentage increase.
4. Country B has 1.5 million households in the poorest fifth, and that fifth receives 7% of total income of £180bn. Find the income per household.
5. A £30 item faces 5% inflation. What is the new price? What if inflation is then 3% the following year?
6. Nominal pay is £1,500 and the price index is 125 (base 100). Find real pay.
7. The CPI rises from 118.4 to 121.9. Calculate the inflation rate to one decimal place.
8. Savings earn 3% and prices rise 5%. Is the real return positive?
9. When inflation falls from 6% to 4%, do prices fall? Explain.
10. State one cause of demand-pull inflation and one of cost-push inflation.
11. State two differences between income and wealth.

Answers

1. 1,850 − 210 − 75 = £1,565.
2. Assets = 95,000 + 3,500 + 2,000 = 100,500. Liabilities = 60,800. Net wealth = £39,700.
3. (516 − 480) ÷ 480 × 100 = 7.5%.
4. 7% of £180bn = £12.6bn; ÷ 1.5 million = £8,400.
5. 30 × 1.05 = £31.50; then 31.50 × 1.03 = £32.45 (to the nearest penny).
6. 1,500 ÷ 125 × 100 = £1,200 (in base-year prices).
7. (121.9 − 118.4) ÷ 118.4 × 100 = 2.96, so 3.0%.
8. No. The real return is about 3 − 5 = −2%; more precisely 1.03 ÷ 1.05 − 1 = −1.9%.
9. No. Prices still rise at 4% a year, only more slowly than before. Prices fall only in deflation.
10. Any one of each, such as lower interest rates raising spending (demand-pull) and higher energy prices raising costs (cost-push).
11. Income is a flow over a period while wealth is a stock at a point in time; income is money received, wealth is assets less debts.

Where marks are usually lost

• Treating a loan or mortgage as an asset, or ignoring liabilities in net wealth.
• Using the wrong total: dividing a fifth’s income by all households, not the households in that fifth.
• Adding yearly inflation rates instead of multiplying growth factors.
• Forgetting the weights when calculating the CPI, or the weights not adding to 1.
• Dividing by the wrong index when finding real values.
• Describing falling inflation as falling prices.
• Giving a list of causes or consequences with no chain of reasoning.
• Evaluating without a judgement: saying “it depends” without saying on what, and then choosing.
• Writing about firms when the question asks about savers, or the government, or consumers.

Official syllabus

OCR GCSE (9-1) Economics (J205), Version 2.0, June 2026, first assessment 2019, published by OCR; sections 3.3 and 3.4.