HookThe best and worst news in economics, on one page
Two facts, same forty years. In 1990, roughly 38% of humanity lived in extreme poverty — below the line the World Bank now draws at $2.15 a day. By 2019 the share was under 9%: the fastest escape from destitution in recorded history, driven overwhelmingly by Asia. China alone accounts for close to 800 million people lifted over the line since its 1978 reforms, and in February 2021 Beijing declared extreme rural poverty eliminated. That is the best news.
The other fact: over the same decades, inequality WITHIN many countries — including Britain, America and China itself — rose sharply. The UK's Gini coefficient jumped in the 1980s and has hovered around 0.35 since, and around 14 million people in the UK, including over 4 million children, live in relative poverty after housing costs. Poverty collapsing while inequality persists is not a contradiction — it is the difference between a level and a gap, and confusing the two is the single most common way to lose marks on this section.
ModelMeasuring it — absolute, relative, income, wealth
Absolute poverty is a level: living below a fixed real threshold — the World Bank's $2.15 a day (at 2017 prices) marks extreme poverty, a line meant to capture bare survival. Relative poverty is a gap: the UK definition is a household below 60% of median income, so it moves with the whole distribution — a society can grow richer and still see relative poverty rise if the middle pulls away from the bottom.
Distinguish income (a flow — wages, profits, benefits received per year) from wealth (a stock — houses, pensions and shares owned at a point in time). Wealth is always the more unequal of the two: ONS data put the richest tenth of British households at around 43% of all wealth, far above their share of income.
The summary statistic is the Gini coefficient: 0 means everyone has the same, 1 means one person has everything. It is derived from the Lorenz curve, which plots the cumulative share of income against the cumulative share of the population; the Gini is the gap between that curve and the diagonal of perfect equality, so a sagging curve means a bigger number. Learn a scale you can quote from memory: Nordic countries around 0.25–0.27, the UK about 0.35, the United States around 0.40, and South Africa — the world's most unequal major economy — about 0.63. One number per country; examiners notice.
MechanismReducing poverty — growth, and everything else
Nothing in history has cut absolute poverty like economic growth: China's escape was built on export-led industrialisation, not on aid. Growth raises wages, tax capacity and the affordability of schools and clinics — which is why 'trade, not aid' became a development slogan. But growth is a tide, not a targeting mechanism; the rest of the toolkit aims at whoever the tide misses.
Education, especially of girls, carries some of the highest measured returns in development economics. Microfinance — tiny loans to people banks ignore — was pioneered by Muhammad Yunus's Grameen Bank (founded 1983; Nobel Peace Prize 2006), lending overwhelmingly to women; careful evaluations find its effects more modest than the early hype claimed, which is itself a strong evaluation point. Fair trade schemes guarantee minimum prices to producers at the risk of dulling the price signal. And remittances — money sent home by migrant workers, over $600bn a year to developing countries — now run at roughly three times global official aid: the most direct poverty transfer on earth, flowing from globalised labour markets straight into village economies. India alone received well over $100bn in 2023, more than any country in history.
ModelWhat inequality does to each economic agent
Edexcel's framing is 'the impact of inequality on economic agents' — so take the agents in turn. Consumers and households: poorer households spend a higher fraction of each extra pound (a higher marginal propensity to consume), so concentrating income at the top, where more is saved, can drain aggregate demand. Firms: inequality reshapes markets into an hourglass — premium and discount both thrive while the middle is squeezed; the same decade that grew Aldi and Lidl also grew Waitrose and first-class cabins, while mid-market chains struggled. Workers: some inequality is incentive — the return to skills, effort and enterprise — but extreme gaps are associated with weaker health, education and social mobility outcomes, which erode the future workforce. Governments: inequality drives welfare spending, strains public services and feeds political instability; IMF research suggests high inequality tends to shorten growth spells.
The evaluation lives in the tension: redistribute too little and demand and cohesion suffer; too aggressively and incentives to work, invest and innovate can blunt. The exam question is never 'inequality: good or bad?' but 'how much, of what kind, and at whose expense?'
MechanismRe-distribution — the state's four levers
The UK redistributes through four channels. Progressive taxation: income tax rises in steps — 0% up to the £12,570 personal allowance, 20% basic rate, 40% above £50,270, 45% at the very top — so the average rate climbs with income. Transfer payments: cash benefits such as Universal Credit and the state pension. Benefits in kind: services consumed regardless of tax paid — the NHS (roughly £180bn a year) and state schooling are worth proportionally most to the poorest households. And the minimum wage compresses the bottom of the pay distribution before tax even starts.
How much does the machine achieve? ONS analysis shows the combined system cuts the UK's Gini from about 0.5 on original market income to roughly 0.3 after taxes, cash benefits and services in kind are counted — the single biggest anti-inequality device in the country, and the statistic most worth memorising in this section.
How progressive is UK income tax? Compare two earners under 2024–25 rules, ignoring National Insurance for simplicity. On £30,000: the first £12,570 is tax-free; the remaining £17,430 is taxed at 20% = £3,486. Average rate: £3,486 ÷ £30,000 ≈ 11.6%. On £80,000: £12,570 free; the next £37,700 at 20% = £7,540; the remaining £29,730 (£80,000 − £50,270) at 40% = £11,892. Total £19,432; average rate £19,432 ÷ £80,000 ≈ 24.3%. The higher earner has 2.7 times the income but pays 5.6 times the tax — and that widening gap between AVERAGE rates, not the mere existence of a 40% band, is what 'progressive' actually means. Quote average rates and examiners know you know.
VocabularyKey terms the mark scheme pays for
TrapsMisconceptions that cost marks
ExamWhat examiners want
Define before you argue: the first marks of almost any 3.6 answer come from crisp definitions of absolute versus relative poverty or income versus wealth, with the thresholds attached ($2.15 a day; 60% of median). Quote Gini values as coordinates — UK about 0.35, South Africa about 0.63 — and deploy the ONS original-versus-final-income comparison (roughly 0.5 down to 0.3) as your single most powerful redistribution statistic.
For evaluation, Edexcel B wants the equity–efficiency trade-off run through NAMED agents: redistribution supports demand via high-MPC households and protects the future workforce, but the 45% top rate and benefit withdrawal can blunt incentives to work and invest. Top answers also land the measurement critique — relative poverty can 'improve' in a recession because the median falls, which says nothing good about the poor. That one sentence, placed in a conclusion, reads like an economist wrote it.