IB Economics HLTopic 3 — Inequality and PovertyPaper 1 & 2Core idea~11 min read
Measuring Inequality and Poverty
Everyone can see that some people have more than others. The hard part is putting a number on it. This page shows you the two tools examiners ask about most — the Lorenz curve and the Gini coefficient — and the difference between being poor and being poor compared to your neighbours.
📚 What you need to know
Equality means people get similar outcomes. Equity means the differences are fair. Equity is a value judgement, so it is normative.
Income is a flow (wages, rent, interest, profit each year). Wealth is a stock (the assets you own).
Absolute poverty = you cannot afford the basics to stay alive and healthy. Relative poverty = your income is far below the typical household in your country.
The Lorenz curve plots cumulative % of income against cumulative % of population. The straight 45° line is perfect equality.
The Gini coefficient turns that curve into one number between 0 and 1. Bigger = more unequal.
Poverty needs more than income, so we also use the MPI, the international poverty line and the minimum income standard.
Equality is not the same as equity
These two words look similar and they are not. Equality is a description: are incomes similar or not? You can measure it. Equity is a judgement: are the differences fair? You cannot measure that, because two sensible people can look at the same gap and disagree about it.
Most people accept that a surgeon earns more than a shelf-stacker — more training, more responsibility. So a bit of inequality feels fair. The argument is always about how much is too much. That is why equity questions are called normative: they contain an opinion.
If a question says “evaluate” or “to what extent”, it is inviting you into the normative side. Say clearly that the acceptable size of wage differentials is a value judgement, then give both views. That single sentence often earns the evaluation mark.
Income and wealth are different things
Think of a bath. Income is the water coming out of the tap each month. Wealth is the water already sitting in the bath. Two families can have the same tap flowing at the same speed while one bath is nearly full and the other nearly empty.
Income inequality — differences in wages, rent, interest and profit received over a year.
Wealth inequality — differences in the assets people own: houses, land, shares, savings.
Wealth inequality is almost always the bigger of the two, and it feeds itself. Assets earn income, and that income can buy more assets. Someone with no assets has nothing working for them while they sleep. This is why inequality is so sticky between generations.
Absolute poverty vs relative poverty
Absolute poverty
Relative poverty
What it means
Cannot afford the basics for a safe, healthy life — food, clean water, shelter, clothing, healthcare
Household income sits far below the typical income in that same country
Measured against
A fixed line, the same everywhere (an international poverty line in dollars a day)
A moving line, usually a set share of median household income in that country
Mostly found in
Low-income developing economies
Every country, including rich ones
Can it ever hit zero?
Yes, in principle, if incomes rise enough
Almost never, because the line moves up as the country gets richer
The trap examiners love. If every income in a country doubles overnight, absolute poverty falls but relative poverty does not move at all — because the median doubled too. Growth on its own does not fix relative poverty; only a change in the shape of the distribution does.
The Lorenz curve
Line everyone in the country up from poorest to richest. Walk along that line and keep a running total of how much income you have passed. Plot that running total against the running total of people. That is a Lorenz curve.
If income were shared perfectly evenly, the poorest 20% of people would hold 20% of the income, the poorest 40% would hold 40%, and so on. That gives a straight diagonal line, called the line of perfect equality. Real countries always sag below it, because the poorest fifth never holds a full fifth of the income.
Both countries end at the same top-right corner — 100% of people always hold 100% of the income. The story is entirely in how deeply the curve dips on the way there.
WORKED EXAMPLE
Turning quintile data into Lorenz points
Southland’s five income quintiles, poorest first, receive 3%, 7%, 12%, 20% and 58% of national income. Find the points you would plot.
Step 1: check the shares add to 1003 + 7 + 12 + 20 + 58 = 100 ✓
Step 2: make each figure cumulative (add as you go)3, then 3+7 = 10, then +12 = 22, then +20 = 42, then +58 = 100Step 3: pair each with the cumulative population(20, 3) (40, 10) (60, 22) (80, 42) (100, 100)always plot cumulative, never the raw quintile shares — that is the classic lost mark
The Gini coefficient
A curve is nice to look at but hard to compare. The Gini turns the picture into one number. Take the gap between the equality line and the actual curve (area A) and divide it by the whole triangle underneath the equality line (area A plus area B).
Gini coefficient
Gini = A ÷ (A + B)
A curve that hugs the equality line leaves almost no blue area, so the Gini is close to 0. A curve that hugs the bottom-right corner makes the blue area huge, pushing the Gini towards 1.
You will sometimes see the Gini written as a coefficient (0.42) and sometimes as a Gini index (42). They are the same thing, one is just multiplied by 100. Use whichever form the data uses and stay consistent.
WORKED EXAMPLE
Explaining a change in the Gini [4 marks]
Southland’s Gini coefficient fell from 0.51 in 2010 to 0.43 in 2020. Using a Lorenz curve diagram, explain what happened to income inequality.
Step 1: decide the direction0.43 < 0.51, and a lower Gini means closer to perfect equality.
Step 2: link the number to the diagram
A smaller Gini means area A shrank, so the curve must have moved inwards, towards the equality line.
Step 3: write the sentence the examiner wantsIncome inequality in Southland fell between 2010 and 2020draw BOTH curves, label the year on each, and add an arrow showing the inward shift
Measuring poverty
Income tells you what a household can buy today. It does not tell you whether their child is in school or whether they have clean water. So poverty is measured with a mix of indicators.
Single indicators
International poverty line — a fixed amount per person per day. Below it, you are in absolute poverty. Simple, and easy to compare across countries.
Minimum income standard — the income the public in that country thinks is needed for a decent life. It changes from place to place, and even between cities and villages.
Other single measures like energy use per person, access to clean water, or the share of girls finishing primary school.
A composite indicator: the MPI
The Multidimensional Poverty Index asks households about deprivation across three areas, then counts how many they suffer.
🧩 What the MPI looks at
Health — child deaths and nutrition.
Education — years of schooling and whether children attend.
Living standards — water, sanitation, electricity, cooking fuel, housing and basic assets.
A household counted as poor if it is deprived in a third or more of the weighted indicators.
Because it is a composite, the MPI can show something income alone hides: two families on the same income can live very different lives if one has a clinic and a school nearby and the other does not.
Why measuring poverty is genuinely hard
Poverty has many dimensions, so any single number leaves something out.
Most data comes from self-reported surveys, and people answer differently in different cultures.
A city household and a rural household can call themselves “poor” while living very different lives.
Data broken down by age, gender or disability is often missing entirely.
Income can also be hidden in the informal economy, so it gets under-recorded.
💡 Exam tips
Label your Lorenz axes fully: cumulative % of income and cumulative % of population. Missing the word “cumulative” costs marks.
Always draw the 45° line of perfect equality first, then hang the curve below it.
When comparing two countries, say which curve is further from the equality line and therefore more unequal. Do not just describe the shape.
Give the Gini its range (0 to 1) when you define it. It is a quick, cheap mark.
Use the word normative when discussing equity, and positive when discussing measured inequality.
If a data question gives quintiles, make them cumulative before you plot anything.
⚠ Common mix-ups
Equality vs equity. Equality is measured, equity is judged. They are not swappable.
Income vs wealth. Income is a flow per year, wealth is a stock owned right now.
Plotting raw quintile shares. The Lorenz curve is cumulative, so it must always rise and finish at (100, 100).
Thinking a higher Gini is good. Higher means more unequal. Closer to zero is the more equal outcome.
Assuming zero inequality is the goal. Perfectly equal pay would remove the incentive to train, work harder or take risks. The debate is about how much inequality, not whether any.
Saying growth ends poverty. Growth can cut absolute poverty while relative poverty stays exactly where it was.
Up next: What Causes Inequality and Poverty — now that you can measure the gap, we look at where it comes from and why it repeats itself generation after generation.
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