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Economics of Inequality and Poverty · Paper 2 — Free Economics HL Practice Questions

1MasteryLAQCauses and consequences of income inequality12 marksPaper 2~18 min

The Gini coefficient for Country X increased from

0.32

in 2010 to

0.45

in 2022. During the same period, the country experienced rapid economic growth driven by a boom in its technology sector, while government spending on social welfare programmes decreased from

8\%

5\%

of GDP. The top

10\%

of earners now control

55\%

of national income, up from

40\%

in 2010.

(a)

Draw a fully labelled Lorenz curve showing the income distribution of Country X in both 2010 and 2022. [2 marks]

(b)

Using your from part (a), explain how the increase in the Gini coefficient from

0.32

0.45

reflects a change income inequality in Country X. [2 marks]

(c)

Using relevant economic theory and the data provided, explain two causes of the increase income inequality in Country X. [4 marks]

(d)

Evaluate the potential consequences of rising income inequality for the macroeconomic performance of Country X. [4 marks]

Solutions

2MasteryLAQCauses and consequences of income inequality10 marksPaper 2~15 min

In Country Y, a developing nation in Sub-Saharan Africa, income inequality is measured by a Gini coefficient of

0.58

. The country has a dual economy: a modern, capital-intensive mining sector (employing

5\%

of the labour force but generating

40\%

of GDP) and a traditional, labour-intensive agricultural sector (employing

70\%

of the labour force but generating only

15\%

of GDP). The government has recently introduced a national minimum wage, but enforcement is weak in rural areas.

(a)

Using the concept of the Lorenz curve, explain what a Gini coefficient of

0.58

indicates about the distribution of income in Country Y. [2 marks]

(b)

Explain two theoretical causes of the high income inequality in Country Y, making explicit reference to the dual economy structure described. [4 marks]

(c)

Using at least one specific stakeholder perspective, evaluate whether high income inequality or the weak enforcement of the minimum wage poses a greater obstacle to economic development in Country Y. [4 marks]

Solutions

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