OxfordAQA International AS and A-level Economics: Poverty and inequality (9640) – Practice Questions

These are original questions written for Marlbridge, for revision and practice on this content. They are not reproduced past-paper questions, and they do not replicate the exam’s exact structure, question count or mark tariffs – examination boards hold copyright in their own papers. Use these alongside the official past papers from your board or school.

These questions cover sections 3.3.5.1 and 3.3.5.2 of the OxfordAQA International AS and A-level Economics (9640) specification, which the specification places in the extra International A2 content. All countries, towns and figures are invented. Read the study guide first, use the revision notes to recall methods, and see the course hub and checklist.

Questions

1. Household H lives in Country P. It owns a house worth 210,000, savings of 22,000, shares worth 18,000 and a car worth 12,000. It owes a mortgage of 140,000 and a personal loan of 9,000. Its annual income is 31,000.

(a) Distinguish between income and wealth. [2] (b) Calculate the household’s net wealth and express it as a multiple of annual income, to one decimal place. [3]

2. Income shares by fifth of households in Country P, poorest to richest. Before tax and benefits: 4%, 8%, 14%, 24%, 50%. After: 6%, 11%, 16%, 25%, 42%.

(a) Calculate the cumulative income share of the poorest four fifths before and after tax and benefits. [2] (b) Calculate the ratio of the richest fifth’s share to the poorest fifth’s share, before and after. [2] (c) State which distribution is more equal. [1]

3. The Gini coefficient for Country P is about 0.43 before tax and benefits and about 0.34 after. Explain what this shows and give two limitations of using the Gini coefficient. [4]

4. Weekly incomes of ten households in Town Y: 90, 130, 170, 200, 240, 280, 330, 400, 560 and 900. Relative poverty is income below 60% of the median.

(a) Find the median and the relative poverty line. [2] (b) What percentage of households is in relative poverty? [1] (c) A year later the eight lowest incomes rise 4% and the two highest rise 20%. The absolute poverty line is a fixed 132. Show that the number of households in absolute poverty falls but the number in relative poverty does not. [2]

5. Explain two causes of poverty. [4]

6. Country R taxes income at 0% up to 10,000, 20% from 10,000 to 40,000 and 40% above 40,000. Calculate the tax and the average tax rate for an earner on 25,000 and an earner on 70,000, and explain what your results show. [5]

7. A worker receives a means-tested benefit withdrawn at 55p for each extra 1 earned. Income tax is 20% of earnings. The worker earns 120 more. Calculate how much of the extra 120 the worker keeps and explain the effect on incentives. [4]

8. A weekly benefit of 210 rises by 3.5%. Over the same period the price index rises from 100 to 105.2. Calculate the percentage change in the benefit’s real value and comment on the effect on absolute poverty. [4]

9. Explain one benefit and one cost of a more equal distribution of income. [6]

10. Explain how excessive inequality can be both a cause and a consequence of market failure. [6]

11. Evaluate the view that means-tested benefits are better than universal benefits as a way to reduce poverty. [10]

Answers

1. (a) Income is a flow of earnings and receipts over a period of time [1]; wealth is a stock of assets less debts at a point in time [1]. [2] (b) Assets = 210,000 + 22,000 + 18,000 + 12,000 = 262,000 [1]. Net wealth = 262,000 − (140,000 + 9,000) = 113,000 [1]. 113,000 / 31,000 = 3.6 times income [1]. [3] Examiner insight: Show assets and debts separately so your working is clear; reporting gross assets as wealth is the usual error.

2. (a) Before: 4 + 8 + 14 + 24 = 50% [1]. After: 6 + 11 + 16 + 25 = 58% [1]. [2] (b) Before: 50 / 4 = 12.5 [1]. After: 42 / 6 = 7 [1]. [2] (c) The distribution after tax and benefits is more equal, because the ratio is smaller and the poorest fifth’s share is higher [1]. [1] Examiner insight: Name the dimension you compare (ratio, bottom share) in the verdict rather than writing “more equal” alone.

3. The fall from 0.43 to 0.34 shows that the Lorenz curve moved closer to the line of equality [1], so the tax and benefit system made income more equally distributed [1]. Limitation: it is a single number, so different distributions can give the same value and it hides where changes occurred [1]. Limitation: it ignores income level, so a country can be equal and poor; it also depends on whether household or individual and pre- or post-tax income is used [1]. [4] Examiner insight: Limitations earn credit when tied to what the Gini cannot show, not when written as generic “data may be inaccurate”.

4. (a) Sorted incomes are already in order; median = (240 + 280) / 2 = 260 [1]. Line = 0.6 × 260 = 156 [1]. [2] (b) 90 and 130 are below 156, so 2 of 10 = 20% [1]. [1] (c) New incomes include 93.6, 135.2, 249.6 and 291.2, so the median is (249.6 + 291.2) / 2 = 270.4 and the line is 162.24; 93.6 and 135.2 are still below, so relative poverty is still 2 households [1]. Against the fixed 132, 90 and 130 were below before but only 93.6 is below now, so absolute poverty falls from 2 households to 1 [1]. [2] Examiner insight: A “show that” works best when you state the new line and compare each relevant income with it, so the reasoning is visible.

5. Cause 1: unemployment. Without wages, households rely on benefits that are usually below earnings [1], so income falls below the poverty line, especially for long-term unemployed workers whose skills decay [1]. Cause 2: low skills and education. Workers with few qualifications have low productivity and bargaining power [1], so they receive low wages and may be trapped in poverty across generations as their children lack resources for education [1]. [4] Examiner insight: A cause scores better when followed through to income and poverty; the cause alone is a list item.

6. Earner on 25,000: tax = 0.20 × 15,000 = 3,000 [1]; average rate = 3,000 / 25,000 = 12% [1]. Earner on 70,000: tax = 0.20 × 30,000 + 0.40 × 30,000 = 6,000 + 12,000 = 18,000 [1]; average rate = 18,000 / 70,000 = 25.7% [1]. The average rate rises with income, so the tax is progressive and narrows the gap in net incomes [1]. [5] Examiner insight: Apply each rate to its band only; applying the top rate to the whole income is a common route to a wrong answer.

7. Tax = 0.20 × 120 = 24 [1]. Benefit lost = 0.55 × 120 = 66 [1]. Kept = 120 − 24 − 66 = 30 [1]. The combined marginal rate is 75%, so the extra work is poorly rewarded and the worker may choose not to work more or look for work, which is the poverty trap [1]. [4] Examiner insight: Convert your answer into a rate (here 75%); it makes the incentive point precise.

8. New benefit = 210 × 1.035 = 217.35 [1]. Real change = 1.035 / 1.052 − 1 [1] = −1.6% [1]. The benefit buys less than before, so recipients near the absolute poverty line may fall below it despite the nominal rise [1]. [4] Examiner insight: Divide the nominal growth factor by the price factor; subtracting the two percentages gives a different figure.

9. Benefit: less poverty and higher cohesion [1]. A more equal distribution raises the incomes of poorer households, who spend a larger share on necessities and can afford education and health care [1], so there is wider access to human capital and lower social tension, which may support growth over time [1]. Cost: incentives. Higher marginal tax rates reduce the reward for extra work, saving and enterprise [1], so some workers or firms supply less effort or investment, or relocate or avoid tax [1], which can reduce output and tax revenue and may leave low-income households less well off than predicted [1]. [6] Examiner insight: Each side needs its own chain from cause to effect; a list of effects with no links stays at statement level.

10. Cause: poor households cannot afford education, health care or insurance, so merit goods are under-consumed [1]. Low human capital cuts productivity and mobility [1]. Wealth can also give market power or political influence, reducing competition [1]. Consequence: markets reward by ability to pay and ownership, not need [1], and market failures such as monopoly profit, information gaps and discrimination can create unequal incomes [1]. So the two reinforce each other: market failure widens inequality and the inequality deepens market failure [1]. [6] Examiner insight: Give a mechanism in each direction; asserting “inequality is market failure” without a reason is not enough.

11. Means-tested benefits direct limited funds to those in greatest need, so the cost per person lifted out of poverty is lower [1] and money can be spent on other priorities [1]. Universal benefits reach everyone, including the poor who do not apply or fail the test, so take-up is higher and stigma lower [1], and administration is simpler [1]. Means-testing creates a poverty trap, as withdrawn benefit plus tax gives high marginal rates [1], which discourages work and can lock households in poverty [1]. Universal benefits spend on households who do not need them, so they need higher taxes that may weaken incentives [1]. Judgement depends on scale and funding: with large budgets and political support for solidarity, universal benefits may suit; with tight budgets and a priority on the poorest, targeting wins [1]. A free-market view favours targeting and low taxes, while an egalitarian view values universal provision for cohesion [1]. A reasoned conclusion could prefer a mix, for example universal child payments plus a tapered top-up for low earners, because it reduces the withdrawal rate [1]. [10] Examiner insight: A strong evaluation weighs both designs against the same criteria (cost, incentives, take-up) and states the value judgement behind the final choice.

Where marks are usually lost

• Reading wealth as the same as income, or leaving out debts.
• Not converting shares into cumulative shares before comparing curves.
• Using the median incorrectly with an even number of values.
• Forgetting that a relative line moves when incomes move.
• Applying a marginal rate to the whole of an income.
• Calling the tax system progressive without comparing average rates.
• Treating a nominal benefit rise as a real rise.
• Making a policy point with no consequence or no value judgement.

Next steps

• Revision notes
• Study guide
• Course hub and checklist
• All free 10-minute diagnostics
• Book a free trial class

Official syllabus

OxfordAQA International AS and A-level Economics (9640), specification version 1.2, sections 3.3.5.1 and 3.3.5.2.