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

This guide covers sections 3.3.5.1 and 3.3.5.2 of the OxfordAQA International AS and A-level Economics (9640) specification: the distribution of income and wealth, poverty, and government policies that change the distribution. The specification says sections 3.1 and 3.2 are International AS content and sections 3.3 and 3.4 are the extra International A2 content, so this unit is International A2 content. All data below are invented and illustrative.

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

What you must be able to do

Section	Outcome
3.3.5.1	Explain factors affecting the distribution of income and of wealth
3.3.5.1	Interpret Lorenz curves and Gini coefficients (you are not expected to calculate a Gini coefficient)
3.3.5.1	Distinguish relative and absolute poverty; explain causes and effects of poverty
3.3.5.1	Weigh benefits and costs of more equal and more unequal distributions; see inequality as both cause and consequence of market failure; recognise that value judgements shape views of fairness
3.3.5.2	Explain policies that alleviate poverty or change the distribution, and their consequences
3.3.5.2	Evaluate approaches, recognising moral and political perspectives

The quantitative skills in section 3.5 (percentages, mean and median, quantiles, index numbers, real terms) appear throughout.

1. Income and wealth

Income is a flow: money received over a period, such as wages, rent, interest, profit and benefits. Wealth is a stock: the value of assets owned at a moment, minus debts.

Worked example. A household in Country M owns a house worth 180,000, savings of 15,000 and a car worth 8,000. It owes a mortgage of 120,000 and credit card debt of 3,000. Its annual income is 26,000.

• Assets = 180,000 + 15,000 + 8,000 = 203,000.
• Liabilities = 120,000 + 3,000 = 123,000.
• Net wealth = 203,000 − 123,000 = 80,000.
• Wealth is 80,000 / 26,000 = 3.1 times annual income.

Wealth is usually distributed more unequally than income, because assets accumulate over generations and a small group holds most of the financial assets.

2. Factors affecting the distribution

Income.

• Pay differences: skills, qualifications and experience raise productivity and the wage a worker can command.
• Market power: strong unions or scarce skills raise pay; weak bargaining position and monopsony lower it.
• Discrimination and unequal access to training or jobs.
• Unemployment and part-time work reduce household income.
• Ownership of capital: rent, interest and dividends flow mainly to asset owners.
• Household structure: a one-earner household with dependants has lower income per person.
• Taxes and benefits, which change income after the market has distributed it.
• Technology and globalisation, which can raise demand for high-skilled labour and cut it for routine work.

Wealth.

• Inheritance and gifts.
• The ability to save, which rises with income.
• Rising asset prices, which reward existing owners (a rise in house prices adds to the wealth of owners and does nothing for renters).
• Age: people typically build wealth through working life and spend it in retirement.
• Entrepreneurship and business ownership.
• Taxes on wealth, inheritance and capital gains.

Chain of reasoning: higher incomes allow saving, saving buys assets, assets earn income and rise in value, so income and wealth inequality reinforce each other.

3. Lorenz curves and Gini coefficients

A Lorenz curve plots the cumulative percentage of income (vertical axis) against the cumulative percentage of households ranked from poorest to richest (horizontal axis). The line of equality is the 45 degree line from the origin. The more the curve bows below that line, the more unequal the distribution.

The Gini coefficient compares two areas: the gap between the Lorenz curve and the equality line, and the whole triangle beneath the equality line. It runs from 0 (perfect equality) to 1 (one household has everything). You interpret it; you do not calculate it.

Worked example. Income shares by fifth of households in Country M, poorest to richest:

Group	Before tax and benefits	After tax and benefits
Poorest 20%	5%	8%
Next 20%	9%	12%
Middle 20%	14%	16%
Next 20%	22%	23%
Richest 20%	50%	41%
Gini (given)	about 0.41	about 0.31

• Cumulative shares before: 5, 14, 28, 50, 100. After: 8, 20, 36, 59, 100.
• The poorest 40% receive 14% before and 20% after.
• Richest to poorest ratio: 50 / 5 = 10 before; 41 / 8 = about 5.1 after.
• The after-tax Lorenz curve lies closer to the line of equality and the Gini is lower, so the tax and benefit system reduced inequality.

Limits of the measures. The Gini is a single number, so different distributions can share the same value. It says nothing about the level of income. It depends on the unit used (individual or household) and on whether income is measured before or after tax. Informal and untaxed income and the cost of living differences between regions may be missed. Wealth data are harder to collect than income data.

4. Relative and absolute poverty

Absolute poverty means income too low to afford a basic fixed set of necessities, whatever others earn. Relative poverty means income below a set share of typical income, often 60% of the median, so it measures exclusion from the normal standard of living.

Worked example. Weekly disposable incomes of nine households in Town X: 120, 150, 180, 210, 260, 300, 340, 420, 720.

• Median = fifth value = 260. Mean = 2,700 / 9 = 300, above the median because of the richest household.
• Relative poverty line = 0.6 × 260 = 156. Households below it: 120 and 150, so 2 of 9 = 22.2%.
• Suppose every income rises 10%. The median becomes 286 and the line 171.6; the households on 132 and 165 are still below it. Relative poverty is still 2 of 9.
• An absolute line of 160 (the fixed cost of a basket of necessities) captures 120 and 150 before, but only 132 after, as 165 now exceeds 160. Absolute poverty falls from 2 households to 1.

Growth that lifts all incomes by the same percentage cuts absolute poverty and leaves relative poverty unchanged. Relative poverty falls only if low incomes grow faster than the median.

5. Causes and effects of poverty

Causes. Unemployment and long-term worklessness; low pay and insecure work; low skills and poor access to education; ill health or disability; large families or single-adult households; old age without adequate pension; discrimination; living in a region with few jobs; inadequate benefits; and, in developing economies, low national output and weak institutions. Poverty also passes between generations: low income limits spending on a child’s education, which limits future earnings.

Effects.

• On individuals: poorer health and life expectancy, weaker educational attainment, lower life chances.
• On the economy: waste of human capital, lower labour productivity, weaker consumer demand, higher spending on health and welfare.
• On society: crime, social exclusion and political instability.

6. Benefits and costs of different distributions

	More equal	More unequal
Benefits	Less poverty; higher total satisfaction if the marginal utility of income falls as income rises; more social cohesion; broader access to education and health care	Stronger incentives to work, train, invest and take risks; more saving by high earners; larger rewards for productivity
Costs	Higher taxes may weaken incentives; high-earners may emigrate or avoid tax; higher state spending	Waste of talent; lower demand from low-income households; social tension; political influence of the rich

Inequality and market failure. Excessive inequality can cause market failure: poor households cannot afford education or health insurance, so merit goods are under-consumed; wealth can buy market power. It can also be a consequence: monopoly profits, information gaps and discrimination in markets create unequal rewards. Markets allocate by ability to pay, not by need, so efficient outcomes can still be unfair.

Value judgements. Positive statements, such as “the Gini fell from 0.41 to 0.31”, can be tested. Whether that is desirable is normative. People differ on how equal is equitable: some value equal outcomes, some equal opportunities, some reward for effort. These views drive policy choices, so a good answer says which view it assumes.

7. Policies to alleviate poverty and change distribution

Progressive taxation. Higher earners pay a higher share of income.

Worked example. Country N charges 0% on income up to 8,000, 15% on 8,000 to 30,000 and 35% above 30,000.

• Earner on 50,000: tax = 0.15 × 22,000 + 0.35 × 20,000 = 3,300 + 7,000 = 10,300. Average rate 20.6%; marginal rate 35%. Net income 39,700.
• Earner on 20,000: tax = 0.15 × 12,000 = 1,800. Average rate 9%. Net income 18,200.
• Gross incomes differ by a factor of 2.5; net incomes by 2.18. Average rates rise with income, so the tax is progressive.
• If the top rate rose to 40%, the 50,000 earner would pay 1,000 more.

Transfers. Cash benefits, pensions and in-kind help. Universal benefits go to everyone; means-tested benefits go to those below an income level, targeting resources but with side effects.

The poverty trap. If a means-tested benefit is withdrawn at 65p per extra 1 earned and income tax is 20%, the combined marginal rate is 85%. A worker earning 80 more keeps 80 − 16 − 52 = 12. A universal benefit would leave 64. The weak reward discourages work.

Other policies. A minimum wage; education and training (which raise future productivity); free or subsidised health, housing and education; wealth and inheritance taxes; regional policy and job creation; and supply-side measures that raise employment.

Consequences. Redistribution can reduce poverty and increase equity, but may reduce work effort, saving and enterprise, raise government spending and the tax burden, and encourage avoidance. Benefit levels also matter in real terms: if a benefit rises 4% while prices rise 6%, real value changes by 1.04 / 1.06 − 1 = −1.9%.

8. Evaluating approaches

Link each policy to a viewpoint. A free-market view stresses incentives and growth, prefers low taxes and limited benefits, and sees inequality as the reward for effort. An egalitarian or interventionist view stresses fairness, equal opportunity and social cohesion, and supports strong redistribution. Evaluate by asking (policy choices carry moral and political judgements as well as economic ones):

• How large is the effect on poverty, and who benefits?
• How big are the incentive effects, and over what time period?
• What does it cost, and who pays?
• Does it treat the cause (education, jobs) or the symptom (cash)?
• Which value judgements does the conclusion depend on?

Common errors

• Treating wealth as a flow or mixing it up with income.
• Calling poverty “not enough money” without defining absolute or relative.
• Saying the Gini coefficient measures income level; it measures spread.
• Writing that growth always reduces relative poverty.
• Describing all taxes as progressive. A tax that takes a larger share from low earners is regressive.
• Offering a policy list with no consequences or judgement.

Official syllabus

OxfordAQA International AS and A-level Economics (9640), specification version 1.2, first teaching September 2020, sections 3.3.5.1 and 3.3.5.2. Check the current specification at oxfordaqaexams.org.uk/economics.