Preview
IB DP Economics — Unit 3: Macroeconomics | SL | 3.4 Economics of Inequality and Poverty
📋 What You Will Learn
- Define poverty, relative poverty, absolute poverty, and income inequality using IB-aligned terminology
- Explain how the Lorenz curve and Gini coefficient measure the distribution of income
- Analyse the role of progressive, regressive, and proportional taxation in redistributing income
- Explain government transfer payments, universal basic income, and targeted spending as tools to reduce poverty
- Evaluate the effectiveness of taxation and social policies in reducing inequality and poverty, considering trade-offs
- Apply real-world examples to assess policy outcomes in different economic contexts
🔍 Guiding Question Can governments effectively reduce poverty and inequality through taxation and redistribution, or do such policies create trade-offs that undermine economic growth and efficiency?
🌍 Why This Matters In 2023, the World Bank reported that approximately 700 million people still live on less than $2.15 per day — the international extreme poverty line. Meanwhile, Oxfam's 2024 report found that the world's five richest men doubled their wealth since 2020, while the poorest 60% of humanity grew poorer. Governments worldwide face the same fundamental question: how do you design a tax and transfer system that reduces these gaps without destroying the incentives that drive economic activity?
Understanding Poverty and Inequality
Before evaluating policies, we need precise definitions. "Poverty" and "inequality" are related but distinct concepts — conflating them leads to confused policy analysis and lost marks.
📖 Definition — Absolute Poverty Absolute poverty exists when individuals lack the income necessary to meet basic human needs, including food, shelter, clothing, and access to clean water. It is typically measured against a fixed threshold — the World Bank's international poverty line of $2.15 per person per day (2017 PPP).
📖 Definition — Relative Poverty Relative poverty exists when individuals have income significantly below the median income of their society, preventing full participation in the normal living standards of that community. A common threshold is income below 60% of the national median. Unlike absolute poverty, relative poverty can persist even in wealthy nations.
📖 Definition — Income Inequality Income inequality refers to the unequal distribution of income across individuals or households in an economy. It is distinct from poverty: a society can have high inequality without widespread absolute poverty (e.g. the United States), or relatively low inequality with significant poverty (e.g. some transition economies).
💡 Poverty vs Inequality — Why the Distinction Matters
- Reducing inequality does not automatically reduce poverty — if everyone becomes equally poor, inequality falls but poverty worsens
- Reducing absolute poverty does not require reducing inequality — economic growth can lift the poorest without narrowing the gap
- Policy tools are often different: poverty reduction targets the bottom of the distribution; inequality reduction concerns the entire distribution
- IB examiners expect you to use the correct term — never use "poverty" when you mean "inequality" or vice versa
Measuring Inequality: The Lorenz Curve and Gini Coefficient
To evaluate whether policies are working, economists need a way to measure inequality. The Lorenz curve provides a visual representation; the Gini coefficient converts it into a single number.
📖 Definition — Lorenz Curve The Lorenz curve plots the cumulative share of total income received against the cumulative share of the population, ranked from lowest to highest income. The further the Lorenz curve bows away from the 45° line of perfect equality, the greater the degree of income inequality.
📖 Definition — Gini Coefficient The Gini coefficient is a numerical measure of income inequality ranging from 0 (perfect equality — everyone has the same income) to 1 (perfect inequality — one person has all the income). It is calculated as the ratio of the area between the line of