Income & Wealth Inequality
1. Income vs Wealth
Income: the reward for the services of a factor of production (FOP).
e.g. wages, salary, bonus and rent.
Income is a flow concept — the returns to the different FOP keep varying over time.
Wealth: the stock of assets someone has built up over time. e.g. property.
2. Inequality of Income / Wealth
Definition: when the gap between the rich and the poor is high — i.e. the rich become richer and the poor become poorer.
3. Reasons for Income Inequality
Remember these as comparisons — each one is a pair of groups earning different incomes:
| # | Reason | Why it creates a gap |
|---|---|---|
| 1 | Private sector VS Public sector | pay levels / job security differ between the two sectors |
| 2 | Full time VS Part time | more hours worked ⇒ more income |
| 3 | Employed VS Unemployed | the unemployed earn no wage (only benefits, if any) |
| 4 | Skills & qualifications | skilled workers are more productive ⇒ paid more |
| 5 | Type of tax system / rate of tax | taxes decide how much income people keep |
| 6 | Low rate of savings | few savings ⇒ little wealth / asset income built up |
| 7 | Lack of investment in education & training | workers stay low-skilled ⇒ low income |
| 8 | Inflation / Discrimination | prices rise faster than some incomes; unequal treatment in pay and jobs |
In an answer pick 2–3 reasons and explain each in economic terms (chain of cause → effect).
4. How to Measure Income Inequality — Gini Coefficient
Definition: the Gini coefficient is a numerical measure of the extent of income inequality in an economy / country.
GC = 1 → all income is earned by one individual
Note: GC near 0 ⇒ income is more equally distributed ⇒ lower inequality.
GC near 1 ⇒ income is more unequally distributed ⇒ higher inequality.
5. Policies to Redistribute Income / Wealth
Govt policies to reduce inequality (redistribute income & wealth) — ★ = teacher says learn with diagram / chain:
- Transfer payments — money to those on low incomes (e.g. benefits)
- Inheritance tax — tax on wealth passed on after death
- Capital gains tax — tax on profit made from selling assets
- Sole provision of essential goods / services by the state (e.g. education, health)
- Investment in infrastructure
Starred on the board: minimum wage ★ + diagram, progressive tax ★, then the rest.
① Minimum wage diagram (labour market)
Pros: raises incomes at the lowest levels ⇒ poverty may fall. Cons: if everyone's income rises there is no redistribution effect; it does not help the self-employed; may cause unemployment and more poverty ⇒ less redistribution if firms cannot afford the higher rate.
② Progressive income tax
Those on lower incomes pay less tax as a % of income than those on higher incomes ⇒ redistributive effect.
Cons: high earners may reduce their tax burden or simply leave the country; it may reduce incentives to earn more.
6. Can Inequality Benefit an Economy?
For "consider whether inequality of income can benefit an economy" — give both sides (that is the evaluation marks).
7. Past Paper — Feb/March 2023, P2 V2, Q3(a)
Q: Explain the possible economic reasons for inequality of income and consider whether inequality of income can benefit an economy. [8]
Mark split: K → 3 · A → 3 · E → 2
- Define inequality of income (K) — the gap between rich and poor is high.
- Reasons for inequality of income (A): part time vs full time · employed vs unemployed · inflation / discrimination · skills & qualifications · type of tax / rate of tax · lack of investment in education & training of workers · private sector vs public sector.
- Advantage of IEY to an economy (E): encourage enterprise → incentive → workers → motivate → retain → productivity ↑.
- Disadvantage of IEY to an economy (E): demotivated → poor people → criminal activities ↑ → unemployment ↑ → transfer payments ↑ → government burden ↑ → opportunity cost.
Don't forget: end with a short judgement — does inequality benefit the economy or not?
8. Past Paper — May/June 2024, P2 V2, Q2(a)
Q: Explain how the Gini coefficient is used to measure income inequality and consider the relative strength of two economic reasons suggested for such inequality in a low-income country. [8]
Mark split: AO1 → 3 · AO2 → 3 · AO3 → 2
- GC = 0 → equal distribution
- GC = 1 → all income is earned by one individual
- The value should be between 0 and 1
- If the value is near zero → income equality / lower inequality
- If the value is near one → income inequality / higher inequality
Mark scheme — what earns the marks
| Skill | Max | What you must write |
|---|---|---|
| AO1 Knowledge | 3 | ① numerical measure of the extent of income inequality in an economy (1) · ② no inequality ⇒ value 0; at the other extreme all income earned by one person ⇒ value 1 (1) · ③ nearer 0 ⇒ more equally distributed; nearer 1 ⇒ more unequally distributed (1) |
| AO2 Analysis | 3 | Explain the strength of two reasons in a low-income country (see next table). Max 2 marks if only one reason. One mark per reason explained, if clearly linked to a low-income country. |
| AO3 Evaluation | 2 | Evaluate the relative strength of the two reasons; 1 mark reserved for a balanced judgement on which is the most likely reason in a low-income economy. |
Reasons for inequality in a low-income country (AO2)
| Reason | Link to low-income country |
|---|---|
| Lack of employment opportunities | fewer jobs ⇒ low income levels; worse in low-income countries as industry is less developed |
| Poor vocational training | few people gain skills ⇒ can't earn higher incomes; worse there due to lack of finance to provide training |
| Lack of investment in education & health | poorer education / long-term ill health ⇒ lower potential income; more common due to small government budget |
| Other: poor infrastructure | — any valid reason is accepted if explained in economic terms |
| Other: lack of access to loan finance | — same: explain it in economics |
9. Past Paper — May/June 2024, Q2(b): Assess Govt Policies
Q: Assess the extent to which government policies to redistribute income and wealth are likely to be successful. [12]
Mark split: AO1 + AO2 (knowledge & analysis) → 8 · AO3 (evaluation) → 4
Policies that may be used: minimum wage rates ★ · transfer payments · progressive income taxes ★ · state provision of essential goods & services · investment in infrastructure.
Any valid policy is accepted, but the analysis must focus on how it redistributes income & wealth and its advantages and disadvantages.
But: if everyone's income rises → no redistribution; no help to the self-employed; may cause unemployment ⇒ more poverty if firms cannot afford it.
But: high earners may reduce their tax burden or leave the country; may reduce incentives to earn more.
Levels of response
| Level | What it looks like |
|---|---|
| L1 | mainly assertive, lacks explanation / mostly descriptive and/or lacks relevance to the question |
| L2 | some inaccuracies, one-sided; analysis explained at least in part and largely relevant |
| L3 | considers alternative policies / concepts; balanced; explanations are accurate and relevant |
10. Quick Recap — Full Chapter Cheat-Sheet
- Income = reward for a factor of production (wages, salary, bonus, rent) · flow concept.
- Wealth = stock of assets built up over time (e.g. property).
- Inequality = big gap between rich and poor (rich richer, poor poorer).
- Reasons: private vs public · full vs part time · employed vs unemployed · skills & qualifications · tax system / rate · low savings · lack of investment in education / training · inflation / discrimination.
- Gini coefficient: numerical measure of income inequality · 0 = equal, 1 = one person has all · near 0 → lower inequality, near 1 → higher inequality · real values lie between 0 and 1 · 0.3 is more equal than 0.5.
- Policies: minimum wage ★ (+ diagram) · progressive tax ★ · transfer payments · inheritance tax · capital gains tax · state provision of essentials · infrastructure investment.
- IEY good: enterprise → incentive → motivation → productivity ↑ · IEY bad: demotivation → crime ↑ → unemployment ↑ → transfers ↑ → govt burden → opportunity cost.
- Exam: 8-marker = AO1 3 + AO2 3 + AO3 2 · 12-marker = 8 (AO1+AO2) + 4 (AO3) · use ≥ 2 policies/reasons · end with a judgement.