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

This guide follows the OCR GCSE (9-1) Economics specification (J205, Version 2.0, June 2026) and covers sections 3.3 (fair distribution of income) and 3.4 (price stability) of topic 3, Economic objectives and the role of government. The qualification is untiered, so everything applies to every candidate. All figures in the examples are invented and illustrative.

Related pages: revision notes, practice questions, course hub, printable checklist and the free diagnostics.

What you must be able to do

Ref	You should be able to
3.3	Explain the distribution of income, including types of income and the difference between income and wealth
3.3	Calculate income and wealth
3.3	Evaluate the causes of differences in the distribution of income and wealth, and the consequences for an economy
3.4	Explain price stability and inflation, including real and nominal values
3.4	Explain how inflation is measured using the Consumer Price Index (CPI)
3.4	Calculate the effect of inflation on prices
3.4	Analyse recent and historical inflation figures
3.4	Evaluate the causes of inflation and the consequences for consumers, producers, savers and the government

3.3 Distribution of income and wealth

Types of income

Income is a flow of money received over a period of time, such as a week, month or year. The main types:

• Wages and salaries: payment for labour. Wages are often paid by the hour, salaries as a yearly sum.
• Interest: payment for lending money or holding savings.
• Rent: payment for letting land or property.
• Profit: the reward for enterprise, which is revenue minus costs. Part of a company’s profit is paid to shareholders as dividends.
• Benefits and pensions: payments from the government, such as support for the unemployed or a state pension. Nothing is produced in return, so they are called transfer payments.

These link to the factors of production: labour earns wages, capital earns interest, land earns rent and enterprise earns profit.

Gross pay is pay before deductions. Net pay (take-home pay) is what remains after income tax and other deductions such as pension contributions.

Income and wealth

	Income	Wealth
Meaning	Money received over a period	The value of what a person owns at a moment, less what they owe
Type	A flow	A stock
Examples	Salary, interest, rent	Property, savings, shares, a car, minus a mortgage or debts

A high earner with debts can be income-rich but wealth-poor; a retired homeowner with a small pension is the reverse.

Worked example 1: calculating income

A worker in Country A (an invented country) earns a gross salary of £2,600 per month. Each month £390 goes in income tax and £130 in pension contributions. She also lets a spare room for £400 per month and holds £6,000 in savings paying 2.5% interest a year.

• Net pay per month = 2,600 − 390 − 130 = £2,080.
• Annual gross salary = 2,600 × 12 = £31,200.
• Annual interest = 6,000 × 2.5% = £150.
• Annual rent = 400 × 12 = £4,800.
• Total annual gross income = 31,200 + 150 + 4,800 = £36,150.

Worked example 2: calculating wealth

Net wealth = total assets − total liabilities.

A household in Country A owns a house worth £180,000, savings of £12,000 and a car worth £6,000. It owes a mortgage of £110,000 and credit card debt of £1,500.

• Assets = 180,000 + 12,000 + 6,000 = £198,000.
• Liabilities = 110,000 + 1,500 = £111,500.
• Net wealth = 198,000 − 111,500 = £86,500.

Reading a distribution

Economists often split households into five equal groups, from the poorest fifth to the richest fifth, and compare the share of total income each group receives. An equal distribution would give every fifth 20%.

Worked example 3. Country A has 10 million households (2 million per fifth) and total household income of £250 billion.

Fifth	Share before tax and benefits	Income per household	Share after tax and benefits	Income per household
Poorest	6%	£7,500	8%	£10,000
Second	11%	£13,750	12%	£15,000
Middle	16%	£20,000	17%	£21,250
Fourth	23%	£28,750	23%	£28,750
Richest	44%	£55,000	40%	£50,000

Working for the poorest fifth before tax: 6% of £250bn = £15bn, divided by 2 million households = £7,500. The richest fifth receives 44 ÷ 6 = 7.3 times as much per household as the poorest. After tax and benefits the ratio is 40 ÷ 8 = 5.0. So taxes and benefits narrow the gap but do not remove it.

Wealth is usually shared less equally than income. In an invented example, the richest 10% of households own 55% of wealth and the poorest 50% own 4%. Per household that is 5.5 against 0.08 units, a gap of about 69 times.

“Fair” is a value judgement: an unequal distribution is not automatically unfair.

Causes of differences

Cause	Chain of reasoning
Education and skills	Scarce, valuable skills raise productivity, so employers pay more
Occupation and sector	Where labour is scarce, or revenue per worker is high, wages are higher
Unemployment and hours	No work, or few hours, means low earnings and a reliance on benefits
Ownership of assets	Property and shares earn rent, interest and dividends on top of wages
Inheritance and gifts	Wealth passes between generations, so starting points differ
Discrimination	Unequal pay or access to jobs for similar ability
Government policy	Taxes, benefits and the minimum wage narrow or widen gaps

Consequences for an economy

• Poverty and living standards: low earners may struggle to afford housing, food and education, which can reduce health and later earnings.
• Spending: poorer households spend most of extra income, richer ones save more, so a very uneven distribution can reduce consumer spending.
• Government: more people needing benefits raises spending and lowers tax revenue, so there may be an opportunity cost in other services.
• Incentives: some inequality rewards effort and skill and encourages enterprise, so too little inequality could weaken incentives.

Evaluation. Judge how large the gap is, whether it is falling over time, whether low earners can move up (mobility), and which policies are used. Redistribution narrows gaps but may weaken incentives. A good conclusion decides which consequences matter most in the context given and explains why.

3.4 Price stability and inflation

Inflation is a continuing rise in the average level of prices. The inflation rate measures how fast prices are rising, so it is a percentage change. Price stability means low and steady inflation, which lets households and firms plan. It does not mean prices never change. If prices fall over time that is deflation. Be careful: when inflation falls from 9% to 5%, prices are still rising, only more slowly.

Real and nominal values

A nominal value is measured in current money, unadjusted for price changes. A real value is adjusted for inflation, so it shows what the money can buy.

Real value = nominal value ÷ price index × 100.

Worked example 4. A worker’s pay rises from £2,000 to £2,100 a month (up 5% in nominal terms) while the price index rises from 100 to 108.

• Real pay = 2,100 ÷ 108 × 100 = £1,944 (to the nearest pound), in base-year prices.
• Real change = (1,944 − 2,000) ÷ 2,000 = −2.8%.

Pay rose 5% and prices rose 8%, so the worker can buy less. The same idea applies to interest rates: a nominal rate of 2% with inflation of 4% means a real return below zero.

Measuring inflation with the CPI

The Consumer Price Index tracks the cost of a typical household’s spending.

1. A basket of goods and services bought by a typical household is chosen.
2. Prices of the items are collected regularly.
3. Items are weighted by their share of household spending, so a rise in the price of food, which is a large share, matters more than a rise in the price of clothing.
4. The weighted average is expressed as an index, with a base year set at 100.
5. The inflation rate is the percentage change in the index.

Worked example 5 (Country A, illustrative). Base year = 100.

Category	Weight	Price index, Year 1	Weight × index
Food	0.30	106	31.8
Housing and energy	0.25	112	28.0
Transport	0.15	104	15.6
Clothing	0.10	101	10.1
Recreation	0.20	103	20.6
CPI	1.00		106.1

Inflation in Year 1 = 6.1%. If the CPI is 109.3 in Year 2, inflation = (109.3 − 106.1) ÷ 106.1 × 100 = 3.0%. Prices are still rising, but more slowly.

Limitations. The basket may not match your own spending, households differ by age, income and region, and quality changes are hard to measure.

Calculating the effect of inflation on prices

New price = old price × (1 + inflation rate).

• A £4.00 loaf with 3% inflation costs 4.00 × 1.03 = £4.12.
• If inflation is 2%, 4% and 6% in three successive years, a £250 item costs 250 × 1.02 × 1.04 × 1.06 = £281.11. This is not 250 plus 12%, because each year’s rise is applied to the already-higher price.

Analysing inflation figures

Worked example 6. Country A’s inflation rates (illustrative, Years 1 to 10):

Year	1	2	3	4	5	6	7	8	9	10
Inflation (%)	2.1	2.4	1.8	0.9	1.6	3.1	6.8	9.2	5.4	2.9

• Average for Years 1 to 5 is 1.76%, against 5.48% for Years 6 to 10: inflation was low and stable, then accelerated.
• The peak is Year 8 at 9.2%. In Years 9 and 10 the rate fell, but prices kept rising.
• Price level in Year 10 compared with Year 5 = 1.031 × 1.068 × 1.092 × 1.054 × 1.029 = 1.304, so prices rose by 30.4%. A £40 item in Year 5 would cost about £52.16.

When analysing a table, quote figures, describe the trend, calculate where useful and suggest a cause or consequence.

Causes of inflation

• Demand-pull: total spending rises faster than the economy can supply. Causes include higher consumer confidence, lower interest rates, tax cuts, more government spending or strong export demand. Firms raise prices when demand is strong.
• Cost-push: firms’ costs rise and are passed on. Causes include higher wages, raw material or energy prices, and indirect taxes.
• Imported inflation: a fall in the value of the currency makes imported goods and materials dearer.
• Expectations: if people expect rising prices they ask for higher pay, which raises costs.

Consequences of inflation

Group	Possible effects
Consumers	Falling purchasing power if pay lags prices; harder for people on fixed incomes; uncertainty; borrowers repay in money worth less
Producers	Higher costs and menu costs; uncertainty may reduce investment; exports may become less competitive if prices rise faster than abroad; revenue may rise if they can raise prices
Savers	Savings lose value if the interest rate is below inflation
Government	Tax revenue and costs rise; the real value of its debt falls; it may raise interest rates to control inflation, slowing the economy

Worked example 7. A saver puts £10,000 in an account paying 2% for one year while prices rise 4%. The balance is £10,200, but 10,200 ÷ 1.04 = £9,808 in start-of-year purchasing power. The saver is worse off by about 1.9%.

Evaluation. The effect depends on the size of the rise, whether it was expected, how long it lasts, and whether incomes keep pace. The same rise can help one group, such as a borrower, and hurt another, such as a saver.

Common errors

• Writing “income” when you mean wealth, or treating a mortgage as an asset.
• Adding simple percentages for inflation over several years instead of compounding.
• Saying prices fell when the inflation rate fell.
• Forgetting to use weights when calculating the CPI.
• Stating “it is bad” without a reason or a named group.

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.