Key Idea: In the same city, one family flies abroad twice a year and another skips meals in the last week of the month. This topic asks two questions about that gap: how do you measure it, and what can a government do about it. Measuring uses one diagram, the Lorenz curve, one number, the Gini coefficient, and two meanings of the word poverty. Fixing it uses taxes, benefits, schools and hospitals, and every tool has a cost. Where you meet it:
Paper 1
- Essays.
- Explain [10]: how a Lorenz curve shows a change in the distribution of income; why poverty is hard to measure.
- Evaluate / Discuss [15]: is taxation the best way to reduce inequality.
Paper 2
- Data response.
- Define [2]: absolute poverty, relative poverty, the Gini coefficient.
- Sketch [2] and Explain [4] with a Lorenz curve: what happened to the distribution between two years.
- Evaluate [15]: policies to reduce poverty and inequality; the effect of rapid growth on the distribution.
The diagram
- One line, one curve, one number.
- The 45° line is perfect equality. The curve bends below it. The Gini coefficient measures how far.
📈 Measuring inequality: the Lorenz curve and the Gini coefficient
Line the whole population up from poorest to richest. Walk along the line and add up the share of the country's income you have passed so far. Plot that running total and you have the Lorenz curve. If everyone earned the same, the poorest 20% would hold 20% of income, the poorest 50% would hold 50%, and the curve would be a straight 45° line.
| On the diagram | What it means |
|---|---|
| Horizontal axis | cumulative % of the population, poorest first |
| Vertical axis | cumulative % of income they hold |
| The 45° line | perfect equality: every group holds exactly its share |
| The curve below the line | the further it bends away from the line, the more unequal the country |
| Gini coefficient | the area between the line and the curve ÷ the whole area under the line. 0 = everyone equal, 1 = one person has everything |
| The curve moves towards the line | the distribution became more equal: the Gini coefficient fell |
The curve starts at (0, 0), ends at (100, 100) and never rises above the 45° line. A curve above the line is impossible: the poorest half cannot hold more than half. Given a table of income shares by fifth of the population, add up both columns as you go before you plot. Plotting the raw shares draws a different diagram. A Gini falling from 0.42 to 0.37 says income is shared more evenly. It does not say anyone got richer.
🏚️ Measuring poverty: two meanings, and what one number misses
Absolute poverty is not having enough income for basic needs: food, shelter, clean water, healthcare. Relative poverty is having far less than is normal in your own society, so it exists in rich countries too. A country can cut absolute poverty while relative poverty rises, if growth reaches the rich faster than the poor: China since 1980.
| Measure | What it counts | What it misses |
|---|---|---|
| Absolute poverty line | income below the cost of basic needs; the World Bank line is $2.15 a day (PPP) | where the line sits is a judgment; prices and needs differ between places |
| Relative poverty | income below 50–60% of the median income in that country | it can rise even when every household is better off than before |
| A single indicator | GDP per capita (average income), life expectancy, or the literacy rate | an average hides the gap; each one measures one thing only |
| A composite indicator | HDI: health, education and income in one score from 0 to 1. MPI: ten signs of deprivation in health, education and living standards; a person is poor if deprived in a third of them | more to collect; the weights are a choice |
Important: Where to draw the line is a choice, and the answer changes with it. A family just above $2.15 a day is not counted, and is still hungry. Income is hard to count: informal work, food a family grows, help from relatives never reach a survey. Poverty is not only money. A household with income but no clean water or school is deprived. That is why the MPI exists, and why a country can have a high GDP per capita and a low HDI: an oil-rich state with poor schools.
🔍 Why the gap opens
Inequality has causes inside a country and causes that come from outside it. An essay that names both, and says which is which, has a structure.
Domestic causes: **Unequal access to education**: the child who leaves school at 14 earns less for the rest of their life.. **Discrimination in the labour market**: women or minority groups paid less for the same work.. **Unequal ownership of assets**: land, buildings and shares are held far more unequally than income, and they earn income on their own.. **A weak or regressive tax and transfer system** that redistributes little..
Global and structural causes: **Globalisation and technology**: skilled workers gain; low-skilled workers see wages stall or jobs move abroad.. **Weak institutions**: corruption and a weak rule of law keep the poor from courts, credit and secure land.. **Geography and conflict**: a landlocked or war-torn region starts behind and stays behind..
Poorer households spend a larger share of any extra income, so a wide gap can mean less spending and slower growth. Talent trapped in poverty is wasted: lower productivity now, a weaker workforce later, and children born poor who stay poor. Extreme inequality brings protest, crime and political instability, which deters investment.
🛠️ Closing the gap: the government's tools
Every tool either moves income now or changes what people can earn later. Every one of them helps someone and costs someone.
| Tool | How it works | The catch |
|---|---|---|
| Progressive taxation | the average rate of tax rises with income, so higher earners hand over a larger share; the Lorenz curve moves towards the line | very high rates may weaken the incentive to work or invest, and invite avoidance; how strong that effect is remains disputed |
| Transfer payments | money from the government with nothing produced in return: unemployment benefit, pensions, child support, cash transfers to poor families (Brazil's Bolsa Família pays if the children attend school and are vaccinated) | taxpayers fund it; badly designed, it can reduce the reason to take a job |
| Direct provision of education and healthcare | free schools and clinics raise what the poor can earn later; the tool that changes the next generation | slow and expensive; the benefit shows up years later |
| Minimum wage | raises pay for the lowest earners in work | set too high, it costs some of them their jobs |
| Anti-discrimination law | equal pay for equal work, by law | needs enforcement to mean anything |
| Land reform and asset redistribution | tackles wealth inequality directly by giving the poor something that earns | politically very difficult |
Growth is necessary but not sufficient: it cut absolute poverty in China, and widened the gap at the same time. One view, the Kuznets curve, says inequality rises first as a country industrialises and falls later; the evidence is mixed (South Korea grew and stayed fairly equal, Brazil grew and did not). What decides it is policy: progressive tax, schooling and safety nets make growth reach the poorest. Split your essay into tools that redistribute now and tools that change earning power later. That split organises the whole answer.
🔢 Doing the tax sums
A progressive income tax works in bands. Only the slice of income inside a band is taxed at that band's rate, never the whole income. Two rates come out of it, and they are different numbers.
- average rate of tax: the share of the whole income paid in tax
- total tax paid (income tax, plus any indirect tax if the question includes it)
- income
- marginal rate of tax: the rate charged on the next unit of income, the rate of the highest band the income reaches
Working a progressive tax
- Slice the income — Cut the income into the bands. Income of 55 000 with bands at 10 000 and 40 000 gives three slices: 10 000, 30 000 and 15 000.
- Tax each slice at its own rate — A tax-free band gives 0. Each other slice × its rate. The last slice is taxed at the marginal rate.
- Add up the slices — The sum is the total income tax. If the question adds a sales tax, work it out as rate × spending and add it too.
- Divide by income — Total tax ÷ income × 100 is the average rate. Always lower than the marginal rate for a progressive tax.
Slice → tax each slice → add up → divide by income
Important: A worker in the 40% band does not pay 40% of their income. Only the top slice is taxed at 40%; the average rate is lower. Taxing the whole income at the top rate is the mistake that loses the calculation. Progressive: the average rate rises with income. Regressive: it falls. Proportional: it stays the same. A sales tax is charged at one rate on spending, and poorer households spend a larger share of their income, so it takes a bigger share from them: regressive. Leaning on indirect taxes tends to raise the Gini coefficient.
✍️ Worked examples
The four shapes this topic is asked in, with new scenarios. Try each before opening the plan.
A text describes families in Germany who cannot afford school trips or a week's holiday, in a country with one of the highest average incomes in Europe. Define the term relative poverty.
Model answer plan
See the mark-by-mark plan — for / against / judgement, with marking guidance — in study mode.
Now the diagram question.
A country introduces a monthly child benefit paid to every family. Over the following five years its Gini coefficient falls from 0.48 to 0.41. Using a Lorenz curve diagram, explain what happened to the distribution of income.
Model answer plan
See the mark-by-mark plan — for / against / judgement, with marking guidance — in study mode.
Now the sums.
In a country the first 10 000 of income is tax free, income from 10 001 to 40 000 is taxed at 20%, and income above 40 000 is taxed at 40%. A worker earns 55 000 a year and pays a 10% sales tax on 30 000 of spending. Calculate the worker's average rate of tax, including both income tax and sales tax.
Model answer plan
See the mark-by-mark plan — for / against / judgement, with marking guidance — in study mode.
And the essay shape.
Using real-world examples, discuss the impact of rapid economic growth on poverty and the distribution of income in a country.
Model answer plan
See the mark-by-mark plan — for / against / judgement, with marking guidance — in study mode.
✅ Quick self-check
Tap each card to check yourself.
What is on each axis of a Lorenz curve? Cumulative % of the population (poorest first) along the bottom, cumulative % of income up the side. Both add up as you go.
A country's Gini coefficient rises from 0.35 to 0.42. What happened? Income became more unequal: the Lorenz curve moved away from the 45° line. It says nothing about whether incomes rose or fell.
Can relative poverty rise while absolute poverty falls? Yes. If growth lifts everyone above basic needs but the rich gain faster, fewer people are in absolute poverty and more are far below the median. China since 1980.
How can a country have a high GDP per capita and a low HDI? GDP per capita is an average income. HDI also counts health and education. An oil-rich state can be rich on paper and still have poor schools and short lives.
Define a progressive tax. A tax whose average rate rises as income rises, so higher earners pay a larger share of their income. A regressive tax does the opposite.
A worker is in the 40% income tax band. Do they pay 40% of their income in tax? No. Only the slice of income inside the highest band is taxed at 40%. The average rate is lower, because the lower slices were taxed less or not at all.
Name two policies that change what people can earn later rather than moving income now. Direct provision of education and healthcare, and anti-discrimination law. Progressive tax and transfer payments move income now.
Why can high inequality slow economic growth? Poorer households spend a larger share of extra income, so a wide gap means less spending. Talent trapped in poverty lowers productivity, and instability deters investment.
Exam tips
- Both axes of a Lorenz curve are cumulative. Write the word on each axis label.
- Draw the 45° line and label it. The curve means nothing without it, and it never rises above it.
- A curve moving towards the line means more equal and a lower Gini. Say both halves of that sentence.
- Relative poverty needs the word median (or 50–60% of the typical income). Absolute poverty needs basic needs, or the $2.15 a day line.
- In a tax calculation, tax each slice at its own rate. Never tax the whole income at the top rate.
- Marginal rate and average rate are different numbers. Say which one you are giving.
- In a 15-marker, split the tools into those that redistribute income now and those that change earning power later, give a real country for each, and end with a verdict.