OxfordAQA International AS and A-level Economics: Poverty and inequality (9640) – Revision Notes

These notes condense sections 3.3.5.1 and 3.3.5.2 of the OxfordAQA International AS and A-level Economics (9640) specification. The specification places section 3.3 in the extra International A2 content. The study guide has the full explanations and worked examples. Then try the practice questions, take a free diagnostic, and tick off the course checklist. The course hub lists everything else. All figures here are invented.

Key definitions

Term	Meaning
Income	A flow of earnings and receipts over a period
Wealth	A stock of assets owned minus debts, at a point in time
Lorenz curve	Cumulative share of income (vertical) against cumulative share of households from poorest (horizontal)
Gini coefficient	Gap between the Lorenz curve and the equality line as a fraction of the triangle under the equality line; 0 is equality, 1 is maximum inequality
Absolute poverty	Income below the cost of a fixed basket of basic necessities
Relative poverty	Income below a share of typical income, often 60% of the median
Progressive tax	Average rate rises with income
Regressive tax	Average rate falls as income rises
Proportional tax	Same average rate at all incomes
Means-tested benefit	Paid only below an income or asset test
Universal benefit	Paid to everyone in a category regardless of income
Poverty trap	Extra earnings are mostly lost through withdrawn benefits and tax

Causes in one view

Income distribution	Wealth distribution
Skills, qualifications, productivity	Inheritance and gifts
Market power and unions	Ability to save from income
Discrimination	Asset price rises (property, shares)
Unemployment, part-time work	Age and life cycle
Capital ownership: rent, interest, dividends	Business ownership
Household structure	Taxes on wealth and capital gains
Taxes and benefits	Financial market access
Technology and globalisation

Wealth is usually more unequal than income, and the two feed each other: income allows saving, saving builds assets, assets earn income.

Method: reading a Lorenz curve or Gini

1. Turn shares into cumulative shares (add as you go from the poorest).
2. Compare the poorest 20% or 40% across the two distributions.
3. State which curve lies closer to the line of equality; that distribution is more equal.
4. Say what the Gini change means in words. You are not asked to calculate a Gini.
5. Add one limit: one number hides shape, ignores income level, and depends on the measure used (before or after tax, household or individual).

Decile and quantile ratios. Country S: the 10th percentile income is 80, the median is 240 and the 90th percentile is 720. The 90th to 10th ratio is 720 / 80 = 9; 90th to median is 3; median to 10th is 3. A ratio describes spread without needing every household.

Mean versus median. Ten households have incomes of 100, 140, 160, 200, 230, 260, 300, 350, 900 and 1,000. Mean = 364, median = (230 + 260) / 2 = 245. The mean is pulled up by the top two, so the median is the better guide to a typical household, and a 60% median line is 147. Households below it: 100 and 140, so 20%.

Method: relative versus absolute poverty

1. Find the median (relative) or the fixed basket cost (absolute).
2. Compute the line: 0.6 × median.
3. Count households below it and divide by the total.
4. After growth, recompute the median for the relative line; keep the basket cost, adjusted only for price changes, for the absolute line.
5. State the result: equal percentage growth for all leaves relative poverty unchanged but can cut absolute poverty.

Real terms and index numbers

Real value = nominal value × 100 / price index. A wage of 36,000 when prices have risen from 100 to 112 is worth 36,000 × 100 / 112 = 32,143 in base-year prices. A benefit index that rises from 100 to 105 while prices rise to 108 has a real index of 105 / 108 × 100 = 97.2, a fall of 2.8%. This is why benefit uprating matters for absolute poverty.

Method: tax and benefit calculations

1. Split income into bands and apply each rate to its slice only.
2. Add slices for total tax.
3. Average rate = tax / income. Marginal rate = rate on the last slice.
4. Compare average rates at different incomes: rising means progressive.

Regressive example. A flat charge of 600 per person is 600 / 12,000 = 5% of a low income and 600 / 60,000 = 1% of a high income, so it is regressive.

Inheritance tax. An estate of 400,000 with a tax-free threshold of 150,000 and a 30% rate pays 0.30 × (400,000 − 150,000) = 75,000, an average rate of 75,000 / 400,000 = 18.75% on the whole estate.

Poverty trap. Benefit withdrawn at 50p per 1 earned, income tax 20%: combined marginal rate 70%. Extra earnings of 200 give 200 − 40 − 100 = 60 net.

Targeting. Paying 50 to each of 200 households costs 10,000. Paying 50 only to the 60 poorest households costs 3,000. Targeting lowers cost but needs a test and can create a poverty trap.

Policy summary

Policy	How it helps	Main drawback
Progressive income tax	Narrows post-tax gaps, funds services	Disincentive and avoidance; may cut effort
Means-tested benefits	Targets the poorest at lower cost	Poverty trap, stigma, incomplete take-up
Universal benefits	Simple, no stigma	High cost, help goes to non-poor
Minimum wage	Raises pay at the bottom	Possible job losses; may not reach the workless
Education and training	Raises productivity and future income	Slow; benefits uncertain
Free health, housing, education	Raises living standards in kind	Spending cost; quality limits
Wealth and inheritance taxes	Reduce wealth concentration	Avoidance, capital flight, small revenue
Regional and job-creation policy	Tackles local worklessness	Expensive; slow

Benefits and costs of more equal and more unequal distributions

• More equal, benefits: less poverty, social cohesion, wider access to education and health care, and extra total satisfaction if an extra unit of income matters more to a poor household.
• More equal, costs: higher taxes can blunt incentives, encourage avoidance and emigration of skilled workers, and raise public spending.
• More unequal, benefits: stronger rewards for effort, training, risk-taking and saving.
• More unequal, costs: wasted talent, weaker spending by low-income households, social tension and unequal political influence.
• Chain: lower taxes raise reward for effort, which may raise output; but if low-income households cannot afford education, productivity growth later suffers.

Evaluation toolkit

• Scale: how many people, and how much?
• Time: transfers work at once; education works over years.
• Incentives: do they change work, saving or investment?
• Cost and funding: tax, borrowing or lower spending elsewhere?
• Cause or symptom: does it address why people are poor?
• Value judgements: free-market views favour incentives and opportunity; interventionist views favour fairness of outcome. State which view your conclusion rests on.
• Inequality as cause and consequence of market failure: under-consumed merit goods and unequal market power on one side; unequal rewards from monopoly and discrimination on the other.

Quick self-test

1. A household has assets of 95,000 and debts of 40,000. What is its net wealth?
2. Distinguish income from wealth in one sentence each.
3. Cumulative income shares for the poorest four fifths of Country T are 6, 17, 33 and 57. What share goes to the richest fifth?
4. A Gini fell from 0.45 to 0.38. What does this say, and what can it not say?
5. Ten households have incomes with a median of 245. What is the 60% median line?
6. Benefit is withdrawn at 50p per 1 earned and tax is 20%. How much of an extra 200 is kept?
7. A wage of 36,000 faces a price index of 112 (base 100). What is the real value?
8. Is a 600 flat charge progressive or regressive for incomes of 12,000 and 60,000?
9. Give one cost of an inheritance tax.
10. Give one way inequality can cause market failure.

Answers

1. 95,000 − 40,000 = 55,000.
2. Income is a flow received over a period; wealth is a stock of assets minus debts at a point in time.
3. 100 − 57 = 43%.
4. Income is more equally spread (the curve moved closer to the line of equality); it does not show the level of income, who gained, or the shape of the change.
5. 0.6 × 245 = 147.
6. 200 − 40 − 100 = 60.
7. 32,143 (36,000 × 100 / 112).
8. Regressive: 5% of the low income and 1% of the high income.
9. It can encourage avoidance, such as gifts before death or moving assets abroad, and it may discourage saving.
10. Low-income households cannot afford education or health care, so merit goods are under-consumed.

Where marks are usually lost

• Using a Gini or Lorenz result without saying whether it describes before or after tax.
• Confusing the mean with the median when setting a poverty line.
• Stating that equal percentage growth cuts relative poverty.
• Calling a benefit increase a real increase without checking prices.
• Applying a tax rate to the whole income rather than to the band.
• Listing policies without consequences.
• Concluding without saying which value judgement the conclusion rests on.
• Treating the Gini as a measure of living standards.

Official syllabus

OxfordAQA International AS and A-level Economics (9640), specification version 1.2, sections 3.3.5.1 and 3.3.5.2. Check the current specification at oxfordaqaexams.org.uk/economics.