Inequality (Macroeconomics) | A-Level Economics Notes
These revision notes cover everything you need to know about Inequality for A-Level Economics. They're designed for students studying Edexcel A-Level Economics, and Edexcel International A-Level Economics. Written by Jaisul Naik, UCL Economics graduate and A-Level Economics tutor since 2017.
What is absolute poverty?
Absolute poverty occurs when a person cannot meet their basic needs. The World Bank set a threshold of $1.25 a day in 2008.
What is relative poverty?
Relative poverty occurs when someone is poor in comparison with other people in society. For example, one way to measure relative poverty is to consider those who earn below 60% of the country's median income.
What is the difference between income and wealth?
Income is a flow of money, and wealth is a stock of assets.
One way to accumulate wealth is through saving income, but wealth can also be inherited.
How is inequality measured?
Inequality is measured by the Gini coefficient, and is shown with a Lorenz curve.
The Lorenz curve shows how income is distributed amongst the population.
The gini coefficient is the areas of A/(A+B).
Perfect equality: 0
Perfect inequality: 1
What are two factors that affect income inequality?
Two factors that can affect the level of income inequality are:
The system of income taxes and benefits
Progressive taxes are when the proportion of income that is taxed increases as income increases.
Proportional taxes are when the proportion of income that is taxed stays the same as income increases.
Regressive taxes are when the proportion of income that is taxed decreases as income increases.
The UK tax bands are 0%, 20% and 40% for incomes up to £12570, £50270, and £125,140.
Education and training schemes
Free high quality education provides people with equal opportunity to gain skills, which increases occupational mobility of labour, and makes it easier for people to earn higher incomes regardless of their wealth.
What are two factors that affect wealth inequality?
Inheritance taxes and ownership of assets
If inheritance tax rates are low, the government will find it more difficult to generate tax revenue and redistribute it amongst society. Secondly, high levels of wealth can allow people to earn income without working, which allows them to increase their wealth more easily than someone with fewer assets.
Corruption
Corruption can cause wealth inequality in developing countries.
What are the possible advantages of inequality?
Incentives
Inequality can be somewhat beneficial as it acts as an incentive for people to gain the skills that society demands. Those jobs that are in greater demand will offer higher wages, which works as an incentive for people to gain the relevant skills.
What are the possible disadvantages of inequality?
Living standards
Inequality and relative poverty means that some people are worse off than the rest of society, which means those people are unable to meet as many of their needs and wants. This puts more strain on the government's budget.
Secondly, this can cause social tensions and lead to further issues such as crime and poor health.
Summary questions
- What is absolute poverty?
- What is relative poverty?
- What is the difference between income and wealth?
- How is inequality measured?
- What are two factors that affect income inequality?
- What are two factors that affect wealth inequality?
- What are the possible advantages of inequality?
- What are the possible disadvantages of inequality?
A-Level Economics Tutoring
I offer one-to-one and small group A-Level Economics tutoring for students across the UK and internationally. With 87+ five-star Google reviews and tutoring experience since 2017, I specialise in helping students understand difficult concepts and improve their exam technique.