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Edexcel A Level Economics A Your notes
4.2 Poverty & Inequality

Contents
4.2.1 Absolute & Relative Poverty
4.2.2 Inequality
Page 1 of 9
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4.2.1 Absolute & Relative Poverty

Your notes
Absolute & Relative Poverty
Absolute poverty is a situation where individuals cannot afford to acquire the basic necessities for a
healthy & safe existence
These necessities include shelter, water, nutrition, clothing & healthcare
In 2022, the World Bank defined absolute poverty as anyone who was living on less than $1.90 a
day
Absolute poverty is more prevalent in developing countries than developed ones
Relative poverty is a situation where household income is a certain percentage less than the median
household income in the economy
Poverty in a household is considered relative to income levels in other households
The UK defines relative poverty as households that are living with less than 60% of the median
household income
In May 2022, the median UK monthly household income was £2072/month
This meant that the relative poverty line was any household earning less than £1243,20/month
In early 2022, 22% of the UK population was in relative poverty
Relative poverty is the main form of poverty that occurs in developed countries
Page 2 of 9
Causes of Changes in Poverty

There has been a significant decrease in absolute poverty since 1990 Your notes
There were 1.9 billion people in absolute poverty in 1990. By 2022 it had fallen to 750 million
Absolute poverty can decrease even while income inequality increases

This means that the income of wealthier households is rising faster than the income of the poorer
households
A reduction in absolute & relative poverty requires the benefits of both the workings of the free market
& government intervention
Causes of changes in absolute poverty

There is a strong correlation between economic growth & a decrease in absolute poverty
Economic growth increases household incomes
Government tax & benefit policies can support the most vulnerable groups in society e.g. children,
pensioners, people stuck in long-term unemployment
In developed economies, benefit policies can ensure that no household is living in absolute
poverty
Causes of changes in relative poverty

Rising asset prices can decrease relative poverty in households which own their own properties
Asset prices often increase faster than wages or income
Trade liberalisation increases potential market size & output in an economy

This leads to an increase in the demand for labour & a wage rise
This creates additional income which has a multiplier effect & pulls households out of relative
poverty
Decreased levels of government benefits can lower household income & increase relative poverty
Page 3 of 9
4.2.2 Inequality
Your notes
Inequality
Income & wealth inequality are two different concepts
Income inequality refers to the unequal distribution (flow) of income to households i.e rent,
wages, interest & profit
Wealth inequality refers to differences in the amount of assets that households own
The two main measures of income inequality are the Lorenz Curve & the Gini coefficient
The Lorenz Curve

The Lorenz Curve is a visual representation of the inequality that exists between households in an
economy
Data is commonly presented in quintiles (population divided into 5 groups i.e 20%) or deciles
(population divided into 10 groups i.e 10%)
E.g. in 2021 42% of the income flow in the UK went to the top 20% of households while only 7%
went to the bottom 20%
Perfect income distribution is not the goal (20 % of the population get 20% of the income; 40% get
40% percent of the income etc.)
That would equate to socialism & completely remove incentives for work as everyone would be
paid equally
More equal income distribution is desired as it reduces poverty & social unrest
What constitutes acceptable income equality is a normative economic issue
Page 4 of 9
Your notes
An illustration of Income Inequality for the UK (green line) & Sweden (red line) using a Lorenz Curve
Model. The income distribution in the UK is more unequal than that of Sweden
Diagram Analysis
The line of equality represents perfect income distribution (not desirable)
In the UK the bottom 20% of households receive 5% of the income flow while in Sweden they receive
9% of the income flow
In the UK the top 10% of households receive 45% of the income flow while in Sweden they receive
25%
Sweden has a more equal distribution of income than the UK
The Gini Coefficient

The Lorenz curve can be used to calculate the Gini Coefficient
Page 5 of 9
Your notes
The Gini Coefficient is calculated using the area beneath the line of equality
Diagram Explanation
A
Gini Coefficient =
A+B
A represents the area between the line of equality & the UK Lorenz curve
B represents the area under the Lorenz curve
A value of 0 represents absolute equality (socialism) & 1 represents perfect inequality
In 2022, the USA coefficient was .41 as compared with the UK value of .35
The distribution of income in the UK was more equitable than in the USA
Page 6 of 9
Causes of Income & Wealth Inequality

Numerous factors cause wealth & income inequality Your notes
It is generally true that developed countries have a larger tax base & are able to provide a better level
of support to the poorest households the economy, than developing countries are able to
Cause of Wealth & Income Inequality
Education, Training &

Trade Unions Benefit system Pension payments
Skills
The higher the skill level Countries with strong Countries that provide a State pension payments
the higher the level of trade union membership range of benefits (such as ensure a minimum
income. A country with a tend to have higher levels unemployment, standard of living for
poor education system of income. With low trade disability, child support, retirees resulting in a
will see greater inequality union membership, the housing support etc) more equal distribution
than one with a good exploitation of workers raise the income of the of income. Countries
education system through low wages is lowest 20% of the without it have a much
easier population resulting in higher percentage of
more equal distribution pensioners living in
poverty
Wage Rates Employment Legislation Tax Structure Asset Ownership
The purpose of a national Generally, the more Progressive tax systems Assets generate income.
minimum wage is to workers are protected by allow all income earners The more equal the asset
improve the equity in the law, the better the to contribute to public ownership in an economy
distribution of income. income distribution in an revenue according to the less the inequality in
Without it, more economy e.g. maternity their ability. Decreasing income distribution. This
households would be benefits ensure that new taxes on the lower end & was one reason why the
earning less & inequality mothers have a higher increasing it on the upper UK government changed
would increase level of income during the end would mean that the the law in 1980 allowing
first months of leave after system is more council house tenants the
a birth progressive & there right to buy their property
would be a more equal at a discounted rate. It is
distribution of income also a reason for the
current shared ownership
scheme
Page 7 of 9
Impact of Economic Change & Development on Inequality

In the 1950's Simon Kuznets developed a hypothesis that described how income inequality changed Your notes
as an economy went through stages of industrialisation & development
This hypothesis was explained using the Kuznets Curve
Industrialisation results in increased inequality as some workers move from the lower productivity,
lower paid agricultural sector into the higher productivity manufacturing sector
There is now greater income inequality with the workers left behind
However, at some point, inequality starts to decrease

This is most likely due to government intervention/support funded by increased state tax revenue
brought about as a result of the increased production in the economy
The Kuznets Curve illustrates how income inequality first increases with industrialisation before then
decreasing
Diagram Analysis
Page 8 of 9
As a country changes sectors from primary (farming) to secondary (manufacturing), productivity

increases & the per capita income increases
However, inequality is also increasing as the gap in wages between the primary & secondary sector is Your notes
significant
At some point, the economy will reach a turning point of income where inequality begins to fall
This often occurs as the primary sector diminishes while the secondary & tertiary (services)
sectors increase
Developed economies tend to generate more income from secondary & tertiary sectors
Exam Tip
The Kuznets Curve described above is not in the syllabus. However the Principal Examiner mentions it in
the Guide as one way in which critical thinking can be demonstrated when approaching questions on
income inequality in developing nations.
Capitalism & Inequality

Capitalism is at the heart of free market economics
Under Capitalism, inequality is inevitable
Workers with higher skills receive higher wages
Workers with little to no skills receive little to no wage
Individuals with higher income will acquire more assets leading to higher levels of income
In turn, they can keep on acquiring assets
Individuals with lower income will find it hard to acquire assets
The principles of capitalism are considered important as the incentive to acquire income raises
productivity & output
The long-term cost of capitalism is that the factors of production become concentrated in ownership
with relatively few individuals developing extreme wealth, at the expense of many who lose out
It has been argued that capitalism needs checks & balances to limit the income & wealth inequality
that will naturally develop
This calls for government intervention
Page 9 of 9

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Edexcel A Level Economics A Your notes

4.2 Poverty & Inequality

4.2.1 Absolute & Relative Poverty

Causes of Changes in Poverty

Absolute poverty can decrease even while income inequality increases

Causes of changes in absolute poverty

Causes of changes in relative poverty

Trade liberalisation increases potential market size & output in an economy

The Lorenz Curve

The Gini Coefficient

Causes of Income & Wealth Inequality

Cause of Wealth & Income Inequality

Education, Training &

Wage Rates Employment Legislation Tax Structure Asset Ownership

Impact of Economic Change & Development on Inequality

However, at some point, inequality starts to decrease

As a country changes sectors from primary (farming) to secondary (manufacturing), productivity

Capitalism & Inequality

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