Economics of inequality and poverty Paper 1

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Economics of inequality and poverty Paper 1

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Exam Style Question for Macroeconomics-Economics of inequality and poverty Paper 1

Question

Explain how income inequality might be measured in a country.

▶️Answer/Explanation

Answers may include:

  • definition of income inequality
  • diagram to show a Lorenz curve and how the Gini co-efficient is derived
  • explanation of the methods used to measure income inequality: Lorenz curve, Gini co-efficient
  • examples of countries with income inequality.

Question

Evaluate the view that the best way to reduce income inequality in a country is by using progressive taxation.

▶️Answer/Explanation

Answers may include:

  • definition of progressive taxation, income inequality
  • diagram to show how progressive taxation could decrease income inequality (inward shift of the Lorenz Curve), or a progressive tax diagram
  • explanation of how progressive taxation reduces the disposable income gap between people of lower and higher incomes
  • examples of where or how progressive taxation has been used
  • synthesis or evaluation.

Question

Explain how an economic recession can lead to an increase in absolute poverty.

▶️Answer/Explanation

Answers may include:

  • definitions of economic recession, absolute poverty
  • diagram to show a fall in AD
  • explanation that a recession can lead to a fall in GDP, an increase in unemployment and falling incomes leading to a rise in absolute poverty
  • examples of how a recession has increased absolute poverty.

Question

Evaluate the view that government policies to promote equity will always have a negative effect on efficiency.

▶️Answer/Explanation

Answers may include:

  • definitions of equity and efficiency
  • diagrams to show the government policies used to improve equity
  • explanation of how the government policies used to promote equity might have a negative effect on economic efficiency
  • examples of where governments have used policies to promote equity and reduced efficiency
  • synthesis or evaluation.

Question

Explain how government expenditures are used to promote equity in the distribution of income.

▶️Answer/Explanation

Answers may include:

  • definitions of government expenditure, equity, distribution of income
  • diagram to show two Lorenz curves showing different degrees of inequality
  • explanation that governments can provide or subsidize merit goods such as education and health care to benefit those on low incomes and also increase transfer payments
  • examples of government expenditure measures to promote equity.

Question

Evaluate the impact on efficiency in the allocation of resources when the government uses taxation to promote equity.

▶️Answer/Explanation

Answers may include:

  • definitions of allocative efficiency, taxation, equity
  • a diagram is not required for this question
  • explanation that using taxation can promote equity in the distribution of income but this can lead to negative effects on efficiency. An increase in progressive tax may reduce the incentive to work, reduce FDI in a country and if firms’ costs increase because of higher tax their prices might rise
  • examples of where taxation has been used to promote equity
  • synthesis or evaluation.

Question

Evaluate the view that progressive income tax is the best way to increase equity in an economy.

▶️Answer/Explanation

Answers may include:

  • definitions of progressive income tax, equity
  • diagram to show the impact of progressive income tax on equity
  • explanation of how progressive income tax increases equity by taxing high-income people at a higher rate, which provides more funds for public services that can increase equity, such as education and healthcare
  • examples of progressive taxation to increase equity
  • synthesis or evaluation.

Question

Explain the difficulties involved in measuring poverty.

▶️Answer/Explanation

Answers may include:

  • Terminology: poverty.
  • Explanation: of the difficulties in terms of the different types of poverty, eg absolute and relative, and poverty measured on the basis of income as compared to multi-dimensional poverty; measurement problems involving income versus wealth; problems of using household surveys, differences in costs of living, how far people in poverty are below the poverty line, where to draw the poverty line.
  • Diagram: no diagram is required for this question, although some candidates may choose to use a diagram related to the question.

Question

Using real-world examples, evaluate the view that inequality can best be reduced through the use of taxation.

▶️Answer/Explanation

Answers may include:

  • Terminology: inequality, taxation.
  • Explanation: of the view in terms of the use of progressive taxes and how they can work to make the post-tax distribution of income more equal; the difficulty of reducing income inequalities through any means other than progressive taxation; the selective use of indirect taxes involving higher taxes on luxury goods consumed by the better off and lower taxes/no taxes on essential items needed by the poor.
  • Diagram: use of an appropriate diagram, such as the Lorenz curve to show the impact on inequality.
  • Synthesis (evaluate): a challenge to the view in terms of the possible disincentive effects of progressive taxation and the problems of using indirect taxes; a consideration of alternative measures such as use of transfer payments, a universal basic income, minimum wages, policies to reduce discrimination, other policies to reduce inequalities of opportunity, such as health and education.
  • Examples: real-world examples of changes in taxation and/or other policies reducing inequality.

Question

Evaluate the view that the best way to reduce income inequality in a country is by using progressive taxation

▶️Answer/Explanation

Answers may include:

  • definition of progressive taxation, income inequality
  • diagram to show how progressive taxation could decrease income inequality (inward shift of the Lorenz Curve), or a progressive tax diagram
  • explanation of how progressive taxation reduces the disposable income gap between people of lower and higher incomes
  • examples of where or how progressive taxation has been used
  • synthesis or evaluation.
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