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IB DP Economics — Unit 3: Macroeconomics | SL | 3.4 Economics of Inequality and Poverty
📋 What You Will Learn
- Define income inequality, wealth inequality, and absolute and relative poverty
- Explain the causes of income and wealth inequality, including factor endowments, discrimination, and government policy
- Analyse the Lorenz curve and Gini coefficient as measures of inequality
- Evaluate the economic and social impacts of inequality on growth, efficiency, and wellbeing
- Apply concepts of inequality to real-world contexts and assess policy responses
🔍 Guiding Question Does rising inequality undermine economic growth and social stability, or is some degree of inequality necessary to incentivise productive economic activity?
🌍 Why This Matters In 2023, Oxfam reported that the world's five richest men had doubled their fortunes since 2020, while the bottom 60% of humanity grew poorer. In the same year, the United States recorded a Gini coefficient of 0.49 — among the highest in the developed world — while Denmark's stood at 0.29. Both are wealthy economies. The difference lies not in how much is produced, but in how it is distributed.
Income vs Wealth Inequality
Before analysing causes and impacts, it is essential to distinguish between two related but distinct concepts. Students frequently conflate income and wealth — a distinction that examiners test directly.
📖 Definition — Income Inequality Income inequality refers to the unequal distribution of income (wages, salaries, profits, rent, and transfer payments) among individuals or households in an economy over a given time period.
📖 Definition — Wealth Inequality Wealth inequality refers to the unequal distribution of accumulated assets (property, financial assets, savings, and other forms of stored value) among individuals or households in an economy.
- Income is a flow — it is earned over a period of time (e.g. annual salary of $50,000)
- Wealth is a stock — it is accumulated over a lifetime (e.g. total assets of $500,000)
- Wealth inequality is typically greater than income inequality in most economies — the wealthy accumulate assets that generate further income (capital gains, dividends, rent)
- A person can have high income but low wealth (e.g. a young professional with student debt) or low income but high wealth (e.g. a retired homeowner)
📖 Definition — Absolute Poverty Absolute poverty exists when an individual's income falls below the minimum level necessary to meet basic needs such as food, shelter, and clothing. The World Bank defines the international extreme poverty line as living on less than $2.15 per day (2022 prices).
📖 Definition — Relative Poverty Relative poverty exists when an individual's income falls below a defined proportion of the median income in their society — typically 50% or 60% of median household income. It measures poverty in relation to the living standards of others in the same society.
- Absolute poverty can fall even as relative poverty rises — if median incomes grow faster than the incomes of the poor
- Relative poverty is more relevant in developed economies where basic survival needs are broadly met
- Absolute poverty is the primary concern in low-income countries
Measuring Inequality: The Lorenz Curve
Economists need a visual and quantitative tool to compare inequality across countries and over time. The Lorenz curve provides both.
📖 Definition — Lorenz Curve The Lorenz curve is a graphical representation of the