4.2.2 Inequality Quiz: Pearson Edexcel Economics A, Unit 4

The 20 questions

1. What is the distinction between wealth and income?

   • Wealth is only the cash held in bank accounts, while income includes all assets such as property and shares
   • Wealth is a stock of assets owned at a point in time, while income is a flow of earnings over a period
   • Wealth is a flow of earnings over a period, while income is the stock of assets owned at a single point in time
   • Wealth and income are the same measure, recorded in different currencies in national accounts each year

2. What does a Lorenz curve show?

   • The relationship between tax rates and tax revenue, showing the point at which revenue starts to fall
   • The rate of change of GDP per head over time, plotted against the rate of inflation in the economy
   • The share of the population who are unemployed in each region of the country in a particular year
   • The cumulative share of income received by cumulative shares of the population, ordered from poorest to richest

3. On a Lorenz curve diagram, what would perfect equality look like?

   • A straight 45-degree line from the origin, showing each cumulative share of people earning the same cumulative share of income
   • A horizontal line at zero income, showing that no household in the economy receives any income at all
   • A curve that bows strongly downwards, showing the richest 10 per cent receiving all the income in the economy
   • A vertical line at 100 per cent of income, showing all households receiving the same total income in the year

4. On a Lorenz curve, area A is the area between the line of equality and the Lorenz curve, and area B is the area below the Lorenz curve. If A = 0.25 and B = 0.25, what is the Gini coefficient?

   • 0.25, since the Gini coefficient is always equal to the area A alone on the diagram
   • 2.0, since the Gini coefficient is equal to the ratio of area A to area B multiplied by four
   • 0.5, since Gini = A / (A + B) = 0.25 / 0.50
   • 1.0, since the Gini coefficient is always equal to the sum of areas A and B together

5. What value of the Gini coefficient indicates perfect equality?

   • 1, because the Gini coefficient measures the total share of income received by the poorest household
   • 0, because every household receives the same share of income
   • 100, because the Gini coefficient is expressed as a percentage of the total income of all households
   • 0.5, because a value halfway between zero and one represents an equal distribution of income

6. Which is a cause of income inequality within a country?

   • Differences in education and skills, which create wide differences in earnings between workers
   • A uniform tax rate applied to all households, which ensures that incomes are kept equal after taxes are paid
   • Equal access to education in every region, which removes any differences in skills between the workforce
   • The even spread of wealth across households, which ensures each worker receives the same earnings in every sector

7. Which factor is most likely to explain differences in income between countries?

   • Differences in the number of national holidays observed, which determine how much work is done in each country
   • Differences in the number of hours of sunshine each country receives across its territory in an average year
   • Differences in the colour of banknotes and coins issued by each country's central bank over the past decade
   • Differences in productivity, human capital and institutions that shape the growth of output per worker

8. Which is a cause of wealth inequality?

   • Rising wages for all workers, which prevents the build-up of any wealth in the hands of a small group
   • Inheritance of assets, which passes accumulated wealth from one generation to the next
   • Fixed rates of tax on all forms of income, which ensure that everyone accumulates wealth at the same rate
   • Equal savings rates across all households, which make sure every household builds up the same stock of assets

9. What does the Kuznets curve hypothesis suggest about inequality as an economy develops?

   • Inequality stays the same at every stage of development, because the distribution of income is fixed by culture
   • Inequality always rises with development and never falls, because developed economies are always more unequal than poor ones
   • Inequality may rise in the early stages of development and fall later as more of the population moves into higher-productivity work
   • Inequality falls steadily from the first stage of development, because growth always spreads income equally to everyone

10. Why might economic change lead to higher income inequality?

    • Economic change always reduces the demand for skilled workers, so wages become more equal across the whole workforce
    • Economic change requires the same skills of every worker, which removes the gap between high and low earners
    • Economic change has no effect on wages, because wages are set by government decisions that do not change over time
    • Technological change can raise the demand and pay for high-skilled workers relative to low-skilled workers

11. According to Piketty's central argument, why might wealth inequality rise under capitalism?

    • When the rate of growth exceeds the return on capital, the wealth of owners always falls behind the rest of the economy
    • When the return on capital exceeds the rate of economic growth, wealth held by owners grows faster than the wider economy
    • When wages rise faster than output, capital owners lose their assets to workers in every period of economic growth
    • When governments tax wealth heavily, inequality rises because the rich move their assets into the poorest households

12. Which is a way in which the market system can increase inequality?

    • Returns to scarce skills, property and market power can concentrate income and wealth among a small group
    • Markets prevent the accumulation of any assets, because they only allow the exchange of goods and services in the economy
    • Market prices are fixed by government in every sector, which keeps all incomes equal regardless of skills and effort
    • Competitive markets always remove all differences in income, because prices are set to make every worker equally paid

13. Which tax would be most effective in reducing income inequality?

    • A poll tax of the same amount for every adult, regardless of income, wealth or the level of household spending
    • A progressive income tax whose average rate rises with income, so that high earners pay a larger share of their income
    • A regressive tax on basic goods, which takes a larger share of income from the poorest households in the economy
    • A flat sales tax at the same rate on all goods, which takes the same share of spending from every household

14. Which is the most accurate evaluation of using the Gini coefficient to compare inequality across countries?

    • It is useful but limited, as it can hide changes in the distribution at the top and bottom and depends on data quality
    • It is a complete measure of wellbeing, since it captures all aspects of living standards and public services in each country
    • It shows the level of poverty directly, so it can be used in place of any absolute or relative poverty measure
    • It is always exact, because it is calculated from the total wealth of all households in every country without error

15. A country's Gini coefficient falls from 0.45 to 0.35 over a decade. What does this indicate?

    • Average income has fallen by 10 per cent over the decade, since the Gini coefficient always measures average income
    • Income has become more equally distributed over the decade, although it does not show changes in absolute poverty
    • Absolute poverty has risen sharply, because the Gini coefficient is a measure of the number of people below the poverty line
    • Income has become more unequally distributed, since a lower Gini coefficient means a greater gap between rich and poor

16. Why is wealth inequality often greater than income inequality?

    • Wealth accumulates over time from savings, inheritance and asset returns, so it is held more unequally than current income
    • Wealth is only held by the government, so it cannot be distributed unequally between households in the economy
    • Wealth is always distributed equally, while income is distributed unequally because of differences in working hours
    • Wealth and income are identical in their distribution, because all wealth is simply income that has been saved

17. Which measure would most help to show the distribution of income between the top and bottom of a country?

    • The ratio of the income share of the top 10 per cent to the income share of the bottom 10 per cent
    • The average height of the population, which reveals the differences in nutrition between rich and poor households
    • The rate of inflation in the price of basic foodstuffs, which shows how the cost of living changes over time
    • The number of hospital beds per 1,000 people, which shows the level of public health spending in the economy

18. Why is the Lorenz curve a useful diagram for showing income distribution?

    • It shows the total level of national income in pounds, which is read directly from the vertical axis each year
    • It shows the exact number of households in poverty, using a fixed line drawn across the centre of the diagram
    • It shows how far the income distribution departs from perfect equality, with the gap visible from the line of equality
    • It shows the rate of inflation for each income group, which is measured on the horizontal axis each year

19. On a Lorenz curve diagram, area A is 0.30 and area B is 0.20. What is the Gini coefficient?

    • 1.5, since Gini = A / B = 0.30 / 0.20 gives the value directly
    • 0.4, since Gini = B / (A + B) = 0.20 / 0.50
    • 0.3, since the Gini coefficient is always equal to the area A alone in the diagram
    • 0.6, since Gini = A / (A + B) = 0.30 / 0.50

20. Which is the best evaluation of the claim that capitalism causes income and wealth inequality?

    • Capitalism always causes inequality in every country, so no policy can reduce inequality under any system
    • Capitalism never causes inequality, because market prices always set incomes equal in every sector and region
    • Market returns to capital can concentrate wealth, but outcomes depend on policy, institutions and how gains are shared
    • Capitalism causes inequality only in developing countries, since developed economies are always equal in income

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