CAIE A-Level Economics 3.3 Income and Wealth Inequality Question Bank

What would be included in a measure of wealth?

Chile is the world's biggest copper producer with $28 \%$ of global copper production and the second biggest producer of lithium with $22 \%$ of world production. Overall, mining contributes $11 \%$ of the country's Gross Domestic Product (GDP) and more than $50 \%$ of the value of the country's total exports. World copper and lithium prices have increased quickly since 2020. This has led to strong growth in GDP which is expected to increase by $3.5 \%$ in 2022, exceeding earlier estimates of $2.5 \%$ as world demand is expected to grow following the Covid-19 pandemic. Fig 1.1 shows the world price of copper in United States dollars (US$) per pound (lb) weight. A pound is 454 grammes.

Economic growth in Chile has also been helped by the world's highest rate of vaccination against Covid-19 and a rapid economic recovery from the pandemic which has led to a large increase in consumer spending.

However, the trade in goods surplus has fallen substantially in February 2022. This is mainly because of a $9.2 \%$ fall in the revenue from copper exports due to the higher prices and a fall in world demand during the Covid-19 pandemic. There has also been a $38.3 \%$ increase in the value of imported consumer goods. As a consequence, the current account deficit has widened substantially to US$7.5bn in the first quarter of 2022 from a deficit of US$1.1bn in the first quarter of 2021 despite a surplus of US $\$ 50 \mathrm{~m}$ in the secondary income account.

One of the main benefits of Chile's increased prosperity in recent years has been a decline in the number of people living at or below the minimum income level of US $\$ 5.50$ per day. However, Chile remains the most unequal country in the list of largely developed countries according to the Organisation for Economic Co-operation and Development (OECD) with an income gap $65 \%$ wider than the OECD average. In addition, although the Gini coefficient has fallen from 52.1 to 44.4, this is still higher than lower-income countries such as Haiti and El Salvador.

To try and reduce this inequality in income and wealth, the Chilean government has increased its expenditure on education from $3 \%$ of GDP in 1997 to $5.4 \%$ in 2018. Further recognition of the importance of education as a merit good is shown by the government increasing its education spending by $3.4 \%$ each year since 2018. Chile has also recently made all college tuition free of charge. It is hoped that this will reduce the gap in the quality of education received by the wealthiest and poorest students and open up opportunities for everyone.

Sources: Adapted from reuters.com 2 February 2022, trade.gov/country-commercial-guides/chile-mining, 25 January 2022, bcentral.cl/inicio and statista.com, April 2022

Explain the possible economic reasons for inequality of income and consider whether inequality of income can benefit an economy.