Economics of inequality and poverty: notes and practice questions
- This topic examines economic inequality and poverty, including their definitions, measurement, causes, and impacts.
- Economic inequality refers to the unequal distribution of income and wealth within a society.
- Absolute poverty means lacking basic necessities, while relative poverty is defined in comparison to others in society.
- The Lorenz curve graphically illustrates income distribution, and the Gini coefficient quantifies the degree of inequality, ranging from (perfect equality) to (perfect inequality).
- Poverty is measured by single indicators like international poverty lines and composite indicators such as the Multidimensional Poverty Index (MPI).
- Causes of inequality include differences in human capital, resource ownership, and government policies.
How it is examined
The Lorenz curve is a standard Paper 2 4-mark diagram part. May 2025 Paper 2 TZ1 Q1(f) asked for a Lorenz curve diagram showing two curves plus an explanation that a lower Gini implies a more equal distribution, and the mark scheme specified that wealth is not an acceptable substitute for income on the vertical axis. At HL the tax calculations belong to Paper 3.
- The relationship between equality and equity. (AO2)
- The meaning of economic inequality: unequal distribution of income, and unequal distribution of wealth. (AO2)
- Measuring economic inequality through the Lorenz curve and the Gini coefficient, also called the Gini index. (AO2, AO4)
- The meaning of poverty, and the difference between absolute and relative poverty. (AO2)
- Constructing a Lorenz curve from income quintile data. (AO4)
- Calculating, given the indirect tax rate, the amount of indirect tax paid from a given level or amount of expenditure. (AO4)
- Calculating total tax and average tax rates from a set of data. (AO4)
Guiding questions
- How unequal is an economy, why, and what can be done about it?
Linking questions
- Follows 2.12 (HL), which explains why the free market produces the inequality that 3.4 measures.
- Equity versus equality is defined back in 1.2.
- Progressive taxes reappear as automatic stabilisers in 3.6 (HL).
- Poverty measurement here overlaps with development measurement in 4.8 and poverty traps in 4.9.
Practice questions
4 questions · 4 hardQuestion 1
HardPaper 1 · no calculator25 marks(a) Explain the distinction between absolute poverty and relative poverty, and the difficulties associated with their measurement.
(b) Using real-world examples, evaluate the view that government provision of education and healthcare is the most effective way to reduce poverty.
Start by defining absolute poverty and relative poverty. For the second part of the question, think about the practical challenges a government or international organization would face when trying to count the number of people in each category. Consider issues like data collection, defining 'basic needs', and comparing poverty across different countries.
To evaluate this view, you need to present both sides of the argument. First, explain how spending on education and healthcare can reduce poverty in the long run. Then, consider the limitations or disadvantages of this approach. Are there other policies that might be more effective, or work faster? Use a real-world country example to support your arguments.
Question 2
HardPaper 1 · no calculator25 marks(a) Explain how the Lorenz curve and Gini coefficient are used to measure income inequality.
(b) Using real-world examples, evaluate the view that providing universal access to education is the most effective policy for reducing economic inequality.
Start by defining income inequality. Then, draw a Lorenz curve diagram and explain what each part of it represents. Finally, connect the diagram to the calculation and meaning of the Gini coefficient.
Consider the arguments for why education is an effective policy to reduce inequality. Then, think about its limitations and compare its effectiveness to other policies, such as progressive taxation or transfer payments. Use specific country examples to support your arguments.
Question 3
HardPaper 2 · calculator40 marksRead the extracts and answer the questions that follow.
Text A, Overview of the economy and government policies in Vietnam
1 Vietnam has one of the fastest-growing economies in Asia, driven by strong exports and high levels of foreign direct investment (FDI). This growth has transformed the country, lifting millions out of poverty. Major multinational corporations have established large-scale manufacturing facilities, particularly in electronics and textiles, turning Vietnam into a key hub in global supply chains.
2 This rapid industrialization, however, has created challenges. Inflation has become a persistent concern, fueled by rising domestic demand and higher global energy prices. The economy's heavy reliance on imported raw materials and components makes it vulnerable to supply chain disruptions and currency fluctuations.
3 To support its transition to a higher-value economy, the government has offered various incentives. For instance, it provides a subsidy to domestic producers of electric vehicles (EVs) to encourage green technology and reduce reliance on imported fossil fuels. The government has also been actively managing its currency, the Vietnamese dong (VND), to maintain export competitiveness.
Text B, Labour market and social development in Vietnam
1 Vietnam's economic boom has led to a significant structural shift, with millions of workers moving from agriculture to the industrial and service sectors. To ensure a basic standard of living, the government regularly increases the minimum wage. In 2022, the minimum wage was raised by an average of 6%.
2 While poverty has fallen dramatically, inequality is a growing concern. There is a widening gap in income and opportunities between major urban centres like Ho Chi Minh City and Hanoi, and the more remote, rural provinces. Although youth literacy rates are high, there is a recognized skills gap, where the education system is not fully equipping graduates for the demands of the modern high-tech manufacturing sector.
Text C, Vietnam's trade integration and environmental challenges
1 Vietnam is a member of numerous free trade agreements, including the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and the Regional Comprehensive Economic Partnership (RCEP). These agreements have boosted exports but also increased competition for domestic firms.
2 The environmental cost of industrialization is becoming increasingly apparent. Air and water pollution in industrial zones are significant problems, creating negative externalities that affect public health and long-term sustainability. The government acknowledges these issues and has set ambitious targets for renewable energy, aiming to attract FDI into solar and wind power projects.
Table 1: Selected macroeconomic data for Vietnam
| 2016 | 2022 | |
|---|---|---|
| Real GDP (USD billion) | 205 | 409 |
| Inflation rate (%) | 2.7 | 3.2 |
| Unemployment rate (%) | 2.3 | 2.3 |
| GNI per capita (USD) | 2190 | 4010 |
Table 2: Vietnam's current account, 2023 (billions of USD)
| 2023 | |
|---|---|
| Exports of goods | 355 |
| Imports of goods | 330 |
| Balance of trade in services | –10 |
| Primary income | –20 |
| Secondary income | 15 |
| Current account balance |
Table 3: Development and trade data for Vietnam
| 2016 | 2022 | |
|---|---|---|
| Population (million) | 93 | 99 |
| Gini coefficient | 0.344 | 0.357 |
| FDI inflows (USD billion) | 12.6 | 15.7 |
(a) (i) Define the term subsidy indicated in bold in the text (Text A, paragraph 3).
(a) (ii) Define the term Gini coefficient indicated in bold in Table 3.
(b) (i) Using information from Table 2, calculate Vietnam's balance of trade in goods for 2023 in billions of USD.
(b) (ii) Using information from Table 2 and your answer to part (b)(i), calculate Vietnam's current account balance for 2023 in billions of USD.
(b) (iii) Sketch a demand and supply diagram to show the effect of a subsidy on the market for electric vehicles in Vietnam (Text A, paragraph 3).
(c) Using an AD/AS diagram, explain how an increase in foreign direct investment (FDI) could affect economic growth in Vietnam (Text A, paragraph 1).
(d) Using a Lorenz curve diagram, explain the change in income inequality in Vietnam between 2016 and 2022 as shown in Table 3.
(e) Using an externalities diagram, explain how industrial production can lead to market failure in Vietnam (Text C, paragraph 2).
(f) Using an exchange rate diagram, explain how a rise in export revenue could affect the value of the Vietnamese dong (VND).
(g) Using information from the text/data and your knowledge of economics, discuss the challenges Vietnam faces in achieving sustainable economic development.
Think about what a government gives to a firm to help it produce more or sell at a lower price. What is the nature of this financial support?
This is a numerical measure of income inequality. How is it derived and what do its extreme values (0 and 1) represent?
The balance of trade in goods is the value of goods exported minus the value of goods imported.
The current account balance is the sum of the balance of trade in goods, the balance of trade in services, primary income, and secondary income.
A subsidy lowers the cost of production for firms. How does this affect the supply curve? Show the new equilibrium price and quantity.
FDI is a form of investment. Which component of aggregate demand (AD) does investment fall under? How would an increase in this component affect the AD curve and, consequently, real GDP?
First, look at the Gini coefficient data in Table 3. Did it increase or decrease? What does this mean for income inequality? Then, draw a Lorenz curve diagram showing two curves, one for 2016 and one for 2022, that reflects this change.
Industrial production often creates pollution. Is pollution a cost to the producer or to society? This creates a divergence between private costs and social costs. Illustrate this on a diagram and explain why it leads to overproduction.
When Vietnam's export revenue rises, what must foreigners do to pay for these exports? Does this affect the demand for or supply of the Vietnamese dong? Show the effect on an exchange rate diagram.
Sustainable development has economic, social, and environmental dimensions. Use the stimulus material to identify challenges in each of these areas (e.g., inflation, inequality, pollution). Then, consider any mitigating factors or policies mentioned. Conclude with a balanced judgement on the severity of these challenges.
Question 4
HardPaper 1 · no calculator25 marks(a) Explain how high levels of economic inequality may act as a barrier to economic growth.
(b) Using real-world examples, evaluate the view that trade liberalization is the most effective strategy for achieving economic development.
Think about the various channels through which the distribution of income can affect a country's overall economic performance. Consider the impact on human capital, social stability, and aggregate demand.
Consider the arguments for and against trade liberalization as a development strategy. To evaluate whether it is the 'most effective', you should compare it with other potential strategies, such as interventionist or other market-based policies.
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Where marks are lost
- No real-world example, or a stated one. An answer that names a country and stops cannot reach the top two bands.
- One-sided argument. Balance is an explicit axis. A student who argues only that a policy works is capped at 9 out of 15 on that axis alone.
- Diagram present but not explained. The diagram bullet escalates across three bands: included, included and explained, included and fully explained. A diagram dropped into an answer without prose that refers to it sits at 5 to 6 on a 10-mark part.
