Cambridge International as and a level Economics Ebook

Lorenz curve: 
a graphical representation of inequality.
Gini coeff icient: 
a numerical measure of inequality.
KEY TERMS
Seychelles
0.66
PR China
0.42
South Africa
0.63
USA
0.40
Central African 
Republic
0.56
UK
0.36
Zimbabwe
0.50
India
0.33
Nigeria
0.48
Pakistan
0.30
Sierra Leone
0.43
Denmark
0.25
Table 8.1 
Selected Gini coeff icients (various dates)
Source:
World Bank, 2013
SELF-ASSESSMENT TASK 
8.3
Table 8.2 
shows the extent of income inequality in 
Pakistan and in its Punjab region in 2011.
Pakistan
Punjab
% Population
% Income
% Income
9
2.6
4.3
18
7.1
9.5
36
19.5
17.7
45
27.1
24.6
73
54.8
56.5
91
77.4
85.5
Table 8.2
1
Use the above data to sketch the two Lorenz 
curves.
2
Comment on any diff erences you observe.
Figure 8.9 
The Lorenz curve
0
Cumulative Percentage of income
Cumulative Percentage of population
Equality
100
100
A
B
200
Cambridge International A Level Economics

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Government policies to 
redistribute income and wealth
Th
ere are three main types of policies that are available 
to reduce inequality in the distribution
 
of income and 
wealth. Th
ese are:
1
providing 
benefits
2
through the tax system
3
through other policies.
Providing benefits
A simple way to redistribute income is to pay benefi ts out 
of government spending to those on low incomes. Money 
raised through the tax system is then paid to low income 
persons and families in order to increase their disposable 
income. Th
ere are two types of such benefi ts:
1
Means-tested benefits: 
These benefits are only paid 
to those on low incomes. They are targeted directly at 
those who are seen to be most in need. An example would 
be income support or unemployment benefit. What is 
available varies between countries. In general more is 
likely to be provided in developed economies, since they 
have a more robust tax base to draw upon. However, such 
benefits are not always claimed by those for whom they 
are designed. They can also create a disincentive to work. 
This is the so-called 
poverty trap
and is where a person or 
family is financially worse off working rather than living off
the range of benefits available. Such a situation can occur 
where there is a low income tax threshold and generous 
means-tested benefits up to a certain level of income.
2
Universal benefits: 
These are paid out to everyone in 
certain categories, oft en age related, regardless of their 
income or wealth. Examples include universal state 
pensions and child benefit. Such benefits overcome the two 
problems associated with means-tested benefits. However, 
they imply paying out money to many who do not need it 
and therefore tend to be expensive to operate.
Means-tested benefits: 
benefits that are paid only to 
those whose incomes fall below a certain level.
Poverty trap: 
where an individual or a family are better off
on means-tested benefits rather than working.