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

1MasteryLAQCauses and consequences of income inequality10 marksPaper 2~15 min

Data

In Country X, a developing nation in Southeast Asia, the Gini coefficient has risen from

0.35

in 2000 to

0.48

in 2020. Over the same period, rapid economic growth has been driven by a boom in the technology export sector, creating high-skilled, high-wage jobs concentrated in urban areas. Rural agricultural workers have experienced stagnant wages. Government spending on public education and healthcare has declined as a percentage of GDP. The top

10\%

of earners now capture

45\%

of national income, while the bottom

40\%

capture only

15\%

(a)

Using the data, explain how skill-biased technological change has contributed to rising income inequality in Country X. [3 marks]

(b)

Using a factor market , explain how declining government spending on education has contributed to rising income inequality in Country X. [3 marks]

(c)

Evaluate the consequences of rising income inequality for Country X's long-run economic growth, considering the perspectives of at least two different stakeholders. Justify an overall judgement on whether inequality is likely to sustain or undermine growth. [4 marks]

Solutions

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

Data

In Country Y, a high-income OECD member, the Gini coefficient has remained stable at

0.32

over the past decade. However, the Palma ratio (the income share of the top

10\%

divided by the income share of the bottom

40\%

) has risen from

1.8

2.4

. The government has cut the top marginal income tax rate from

45\%

30\%

and simultaneously raised a flat-rate consumption tax (VAT). The minimum wage has been frozen in nominal terms for five years, and union membership has fallen from

30\%

15\%

of the workforce.

(a)

Using the data, explain one reason why the Palma ratio has risen despite the stable Gini coefficient. [3 marks]

(b)

Using a different piece of data, explain one labour-market reason for the widening gap between the top

10\%

and the bottom

40\%

of income earners in Country Y. [3 marks]

(c)

Using at least two different theoretical perspectives on inequality, evaluate whether the rising Palma ratio is likely to harm Country Y's long-run economic performance. [4 marks]

Solutions

3ChallengeLAQCauses and consequences of income inequality10 marksPaper 2~15 min

Country X is a rapidly industrialising lower-middle-income economy in Southeast Asia. - The Gini coefficient has risen from

0.32

0.48

over the past 20 years. - The top

10\%

of income earners now capture

42\%

of national income, up from

28\%

two decades ago. - The government has maintained a flat corporate tax rate of

15\%

for the past 15 years. - Foreign direct investment (FDI) has flowed heavily into capital-intensive manufacturing (robotics and electronics assembly), creating few low-skill jobs. - Tertiary enrolment remains at

18\%

of the relevant age cohort. - A recent World Bank report notes that social mobility in Country X has fallen significantly.

(a)

Explain how a Lorenz curve can be used to illustrate the change income inequality in Country X over the past 20 years. Use the data provided. [2 marks]

(b)

Explain how skill-biased technological change (SBTC) could contribute to rising income inequality in Country X. [2 marks]

(c)

Evaluate the view that the primary cause of rising income inequality in Country X is technological change, rather than government policy choices or globalisation. Use economic theory, the data provided, and your answers to (a) and (b). [6 marks]

Solutions

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