2022 Paper 2 Flashcards
Using a Lorenz curve diagram, explain how income inequality is measured using the Gini coefficient. Refer to Extract A in your answer. (5)
The UK’s Gini coefficient is 0.34 [Ap] which moves the Lorenz curve further away from the line of perfect equality [Ap]. The further away from the line of perfect equality, the more unequal a country is [An] because the cumulative percentage of income is earned by a smaller cumulative percentage of households [An]. It is measured by the area A/(A+B)
With reference to Figure 1 and Extract A, examine two likely causes of income inequality within the UK. (8)
One reason for income inequality in the
UK is differences in education levels
[KJ. In Rotherham, only 21% of disadvantaged18-year-olds go on to higher education compared to 41% in London [Ap]. A lowerlevel of education reduces access to high-paying jobs, leading to lower average incomes in northern regions [An]
Another factor is unequal infrastructure spending across regions [K]. London received 28% of public transport spending and 46% of railway capital investment in 2017-18, significantly higher than other areas [Ap]. Better infrastructure attracts businesses and skilled workers, increasing job opportunities and wages [Anl
However, investment in northern infrastructure is increasing, meaning the income gap could narrow over time [E]. Additionally, higher education does not always lead to higher incomes, as wages also depend on factors such as job availability
With reference to Figure 2, assess whether an increase in real income improves subjective happiness within the UK.(10)
One way a fall in real incomes reduces subjective happiness is through a fall in consumption [K]. ‘Falling real incomes’ and ‘consumer confidence’ [Ap] mean that consumers have less ability to buy goods and services. Some of these purchases would increase households’ well-being, so there would be a fall in subjective happiness [An] Level 3 KAA
However some consumers may purchase demerit goods like tobacco which can have a negative impact on well-being and health [E]. A fall in real incomes could reduce consumption of these products and improve subjective happiness
“Rising inflation, partly caused by a falling pound” [Ap] means that imports are more expensive and the cost of living is rising [K]. Higher price levels mean consumers’ savings are losing value so they cannot afford products that may have added to their happiness [An]. Consumers could become more stressed and worried [K] as they are are “more vulnerable to falling behind with their credit card and personal loan repayments” [Ap]. As their incomes adjusted for inflation are lower they may struggle to pay off their loans which could lead to more debt or repossessions, negatively impacting their happiness [Anl Level 3 KAA
However, inflation can reduce the real value of debt [E], so if the value of consumers’ debt falls at a faster rate than their decline in real income then it may improve happiness for households with debt
d) With reference to Extract C and your own knowledge, discuss methods the UK government could use to increase tax revenue.
(12)
One method to increase tax revenue is to raise council tax on houses, which is currently based on 1991 house prices [Ap]. House prices have risen significantly in many areas since then [K], meaning tax revenue has not kept pace with property values [An]. If house price data is updated, this could generate significantly more tax revenue for local government and better reflect the current housing market [An] Level 3 KAA
However, increasing council tax could disproportionately affect those living in areas where house prices have risen the most, even if their income has not increased [El. This could make housing less affordable for some, leading to financial strain or even forcing relocation
Another method is increasing corporation tax [K], which is currently one of the lowest in the G7, with the top rate set to rise to 25% by 2023 [App].
The UK government estimates this will generate £17.2 billion in additional revenue by 2025-26 [Ap]. Since some large firms earn significant profits, increasing this tax could be an effective way to raise revenue without directly burdening consumers [An]
Level 3 KAA
However, increasing corporation tax does not always guarantee higher tax revenue [E]. Higher rates may lead to tax evasion, tax avoidance, or disincentivise investment, potentially lowering long-term tax receipts
With reference to Extract B, discuss the benefits of an increase in infrastructure spending on the UK economy. Use an aggregate demand and aggregate supply diagram to support your answer. (15)
An increase in infrastructure spending can lead to higher aggregate demand
(AD) due to increased government spending (G), a key component of AD [K]. As shown in the AD/AS diagram, government investment shifts AD from AD1 to AD2, leading to higher real output (Y to Yl) and a rise in the price level (P to P1) [An]. Improved transport, such as the new Trafford Park tram line in Manchester and reopened train stations in Yorkshire and Wales, makes it easier for workers to access jobs, reducing unemployment and increasing consumer spending, further stimulating economic growth
However, the impact of infrastructure spending depends on its quality and location. If the newly constructed railways and stations are underutilised or poorly planned, the expected economic benefits may not materialise [E]. Additionally, the time lag associated with large-scale infrastructure projects means that while spending increases short-term AD, the full benefits may take years to emerge
In the long run, infrastructure spending can also increase aggregate supply (AS) by reducing transport costs and increasing efficiency [K]. In the diagram, AS shifts from AS to AS1, leading to higher output (Y to Y1) and lower inflationary pressures (P to P1)
[An]. By improving connectivity in poorer regions, such as reopening train stations in Northumberland, the government can encourage new business activity and investment, helping to reduce regional inequality
However, increased public spending raises concerns about government debt. While the UK government is taking advantage of low interest rates, higher borrowing may lead to crowding out, where government borrowing limits private sector investment [E].
Additionally, the multiplier effect may be lower than expected, reducing the effectiveness of infrastructure spending in stimulating economic growth
