3.4 Economics HL of inequality and poverty

Equality means the same outcome or resources; equity considers whether distribution is fair given needs, barriers and context.

A policy can be equal but inequitable, or equitable without identical outcomes.

State whether the claim concerns sameness or fairness and whose perspective matters.

A universal payment is equal; extra support for a barriered group may be more equitable.

Equity is a normative judgement, not a purely statistical fact.

Economic inequality is an uneven distribution of income, wealth or opportunity across people or groups.

The choice of measure and unit—household, individual, pre- or post-tax—changes the comparison.

Define the resource, population and time period before interpreting inequality.

Two countries can have the same mean income but different distributions.

Inequality is not identical to poverty.

Inequality can be described with income shares, percentiles, Lorenz curves and the Gini coefficient.

Each measure summarises a distribution differently; the Gini can hide where in the distribution change occurred.

Match the measure to the question and identify its limitations.

A lower Gini suggests a more equal distribution, but does not show whether all incomes rose.

A single index is not a complete welfare judgement.

A Lorenz curve plots cumulative population from poorest to richest on the horizontal axis and cumulative income on the vertical axis. The 45-degree line represents perfect equality; a curve farther below it indicates greater inequality. If one curve lies everywhere closer to equality, its distribution is less unequal. The Gini coefficient is the area between the equality line and Lorenz curve divided by the total area below the equality line, ranging from 0 (perfect equality) toward 1 (greater inequality). Crossing curves cannot be ranked unambiguously from the diagram alone.

Absolute poverty concerns resources below a basic threshold; relative poverty compares resources with a society’s typical standard.

Measures depend on prices, household composition, non-cash support and the chosen threshold.

State the threshold and compare monetary measure with living conditions.

A household can rise above an absolute line but remain far below median income.

Poverty is multidimensional, not only a dollar figure.

Single poverty indicators include an international poverty line for cross-country extreme-poverty comparisons and a minimum income standard defined for a particular society. Relative poverty is commonly tied to typical income, so it can persist while absolute living standards rise. The Multidimensional Poverty Index combines deprivations such as health, education and living standards. Results depend on prices, household size, informal income, missing data, thresholds, dimensions and weights; therefore state the definition before comparing places or years.

Education, labour markets, ownership, discrimination, technology, geography, institutions and shocks can shape inequality and poverty.

Causes interact: unequal schooling can limit skills, wages and wealth accumulation over time.

Trace a mechanism and distinguish structural from temporary causes.

Automation raises demand for skilled workers while displacing routine jobs.

Do not attribute inequality to one cause without evidence.

Trace interacting channels: unequal opportunity and human capital affect jobs and wages; unequal resource ownership compounds rent, profit and wealth; discrimination and unequal status or power restrict access; tax and benefit rules redistribute or reinforce gaps; globalisation and technology change relative labour demand; and market-based supply-side policies may raise efficiency while weakening protection or bargaining power. A recession can push vulnerable households into absolute poverty, but persistent inequality usually has several structural causes.

Inequality can affect health, education, social cohesion, productivity, political power and stability; effects depend on degree and context.

Low-income households face constrained choices, while extreme concentration can reduce opportunity and demand.

Identify the channel and affected group before evaluating impact.

High housing inequality can lengthen commutes and reduce access to education.

Inequality is not automatically harmful in every degree or dimension.

Inequality can weaken growth when poor households cannot finance education, health or enterprise and when social instability deters investment; alternatively, some reward differences may support effort, saving and innovation. It lowers living standards for groups excluded from income and wealth gains even if the national mean rises, and extreme concentration can reduce trust, mobility and political cohesion. Evaluate degree, opportunity, institutions and whether the distribution changes absolute living standards—not inequality in isolation.

Progressive taxes and transfers can redistribute income, fund services and reduce poverty; they may also affect incentives, administration and tax avoidance.

Incidence depends on elasticities and enforcement, not only the statutory payer.

State the objective, who ultimately pays/receives and the behavioural response.

A refundable tax credit supports low-income workers but costs revenue and may change labour supply.

A progressive schedule does not guarantee progressive outcomes after indirect taxes.

A progressive tax takes a rising average share as income rises; a proportional tax keeps the average share constant; a regressive tax takes a falling share. $\text{average tax rate}=\text{total tax}/\text{income}\times100$, while the marginal rate applies to the next unit. Direct taxes include personal income, corporate income and wealth taxes. Indirect taxes are levied on expenditure and can be regressive because lower-income households may spend a larger income share on taxed goods. Distinguish statutory design from final incidence and the combined tax-transfer outcome.

Education, healthcare, minimum wages, labour rights, public services and targeted transfers can address different causes of poverty and inequality.

Long-run supply-side policies may expand opportunity; short-run transfers relieve hardship but need funding and targeting.

Match policy to cause, time horizon and implementation capacity.

Early-childhood education addresses skill gaps more directly than a temporary consumption voucher.

A policy can reduce inequality while missing poverty, or vice versa.

Match policy to cause: human-capital investment and measures reducing unequal opportunity build long-run earning capacity; transfer payments and targeted goods or services give immediate focused support; universal basic income offers broad coverage with high fiscal cost; anti-discrimination rules address exclusion but require enforcement; and a minimum wage raises low pay where employment effects are limited. Compare targeting errors, access, incentives, administration, fiscal cost, time lag and possible labour-market effects.

A Lorenz curve plots cumulative population share against cumulative income share; the farther it lies below the equality line, the greater inequality.

Order households from poorest to richest and use cumulative shares; the Gini relates to the area between curve and equality line.

Plot correctly, label axes and interpret a shift.

If the bottom 40% receive 15% of income, the point is (40,15).

Do not plot individual rather than cumulative shares.

Indirect tax paid equals the tax rate multiplied by taxable expenditure. Total tax is the sum of the stated tax liabilities, and $\text{average tax rate}=\text{total tax}/\text{income}\times100$.

Convert percentage rates to decimals, apply each rate only to its stated base, add tax amounts, then divide total tax by total income—not by expenditure—to find the average tax rate.

Label every rate and base before calculating; distinguish an indirect tax on spending from direct tax on income and from a marginal rate on an additional income band.

Example

A household spends $12,000 on goods subject to a 5$12,000\times0.05=$600. If it also pays$3,400 direct tax, total tax is $4,000. With income of$40,000, its average tax rate is $4,000/$40,000\times100=10%$.

Use the convention stated in the data: if expenditure is tax-inclusive rather than pre-tax, multiplying it by the quoted rate may not recover the embedded tax. Do not apply a marginal rate to all income.