Income Distribution (Cambridge (CIE) A Level Economics): Revision Note
Exam code: 9708
Inequality
Income and wealth inequality are two different concepts
Income inequality refers to the unequal distribution (flow) of income to households i.e rent, wages, interest and 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 and the Gini coefficient
The Lorenz curve
The Lorenz curve is defined as a graphical representation of income distribution showing the cumulative share of total income received by cumulative shares of the population, ranked from poorest to richest
The horizontal axis shows the cumulative percentage of the population (0–100%), ranked from lowest to highest income
The vertical axis shows the cumulative percentage of total income received by that share of the population
The line of perfect equality is a 45-degree diagonal - at every point, x% of the population earns exactly x% of total income
The Lorenz curve always lies below the line of perfect equality (except at the endpoints 0,0 and 100,100) - the further it bows away from the diagonal, the greater the inequality
Diagram analysis
The line of equality represents perfect income distribution
Comparing two countries: the country whose Lorenz curve lies closer to the diagonal has the more equal distribution
If two Lorenz curves intersect, neither country can be said to have unambiguously greater inequality
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 Gini coefficient is defined as a numerical measure of income inequality derived from the Lorenz curve, calculated as the ratio of the area between the line of perfect equality and the Lorenz curve to the total area under the line of perfect equality
The formula is:
Gini coefficient = A / (A + B)
Where A = area between the line of perfect equality and the Lorenz curve, and B = area below the Lorenz curve
The Gini coefficient ranges from 0 to 1
Value | Interpretation |
|---|---|
0 |
|
Closer to 0 |
|
Closer to 1 |
|
1 |
|
In practice, Gini coefficients typically range from around 0.25 (highly equal, e.g. Scandinavia) to above 0.60 (highly unequal, e.g. South Africa)
A falling Gini coefficient over time indicates that income distribution is becoming more equal; a rising coefficient indicates widening inequality
Limitations of the Gini coefficient
Limitation | Explanation |
|---|---|
Single summary statistic |
|
Ignores absolute income levels |
|
Does not capture wealth inequality |
|
Data reliability |
|
Intersecting Lorenz curves |
|
Worked Example
What indicates that a more equal distribution of income has been achieved?
A | A faster rate of economic growth |
B | A higher Human Development Index |
C | A lower Gini coefficient |
D | A lower tax / GDP ratio |
Answer: C
The Gini coefficient directly measures income inequality - a lower value means income is more equally distributed, so C is the only option that definitively indicates greater equality
Worked solution
Option A is incorrect — faster growth can widen inequality if gains are concentrated at the top, as the Kuznets curve illustrates
Option B is incorrect — the HDI measures health, education and income but not distribution; a high HDI can coexist with high inequality
Option D is incorrect — a lower tax/GDP ratio generally implies less redistribution, which would tend to increase rather than decrease inequality
Examiner Tips and Tricks
The most common error is confusing the Gini coefficient with the Lorenz curve - the Lorenz curve is the diagram, the Gini is the number derived from it.
Examiners frequently ask students to interpret a change in the Gini over time or compare two countries; always link the direction of change to a specific cause, such as government redistribution policy, wage growth at the top, or changes in tax progressivity.
The strongest evaluation point is that a falling Gini does not necessarily mean poverty has fallen - inequality and absolute poverty are distinct concepts.
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