Economics of Inequality and Poverty

Goals for the section:

1. Distinguish between equity and equality

2. Explain the meaning of inequality

3. Explain how income inequality may be measured

4. Illustrate how the Lorenz curve shows inequality

5. Explain the relationship between the Lorenz curve and the Gini index.

HL: Construct a Lorenz curve

6. Explain the meaning of poverty

7. Explain how poverty is measured

8. Explain the Multidimensional Poverty Index

9. Describe some of the causes of inequality and poverty

10. Discuss the impact of inequality on economic growth, living standards and social stability.

11. Discuss the role of taxation in reducing poverty, income and wealth inequalities.

12. Evaluate policies available to a government to reduce poverty, income and wealth inequalities.

What are the types and causes of poverty?

Can being wealthy make you less likely to help others?

Evaluate policies available to a government to reduce poverty, income and wealth inequalities.

Search to find answers for the following questions:

1. What are the arguments for and against progressive taxes as a measure of achieving a more equitable distribution of income?

2. What other policies may be used to reduce poverty and inequalities in income and wealth?

3. What are policies to promote equal opportunities through investment in human capital?

4. What are policies to reduce gender and other discrimination?

5. What are the pros and cons of increased minimum wage?

6. What is Universal Basic Income and how might it help?

Examination Questions

Paper 1 part a questions:

1. Distinguish between equity and equality.

2. Explain two ways in which a country might establish its national poverty line.

3. Explain the difference between absolute and relative poverty.

4. Explain two causes of inequality

5. Explain what would happen to the distribution of income if a country were to decrease the direct tax rates for top income earners, and reduce its indirect tax rate.

HL only:

1. Analyze the relationahisp between a country's Gini coefficient and its Lorenz curve.

part b. questions (HL only)

1. Using real-world examples, evaluate the consequences of a country adopting a more progressive tax structure.

2. Using real-world examples, evaluate the effectiveness of minimum wages in achieving a more equitable distribution of income.

3. Using real-world examples, discuss the extent to which transfer payments can alleviate poverty

4. Using real-world examples, evaluate the view that a government's fiscal policy can be both a cause of inequality and a means of reducing inequality.

4-mark questions (HL P2, SL P2 or HL P3)

1. A country increases its indirect tax rate. Using a Lorenz curve diagram, explain how this may impact the country's distribution of income.

2. Citizen A in a country earns $130,000 and pays $12,000 in taxes. Citizen B earns $55,000 and pays $10,000 in taxes. Explain whether the tax structure is progressive or regressive (HL only)