This page contains a practice question and model answer on inequality. It is written in the style of AQA Economics A Level.
Contents
Inequality practice question
The question is:
Evaluate the consequences of income inequality. [25 marks]
Below is the model answer.
It is split into paragraphs with subtitles for easier reading, but the subtitles are not required for the exam.
Brief introduction
Income inequality refers to differences in income levels between different people. The 1% highest earners in the UK made up 13.3% of the UK’s total national income in 2024-25. I will argue that the consequences of income inequality are negative on balance, driven by a slowdown in the rate of economic growth.
Analysis point 1
Income inequality can reduce the rate of economic growth. The UK’s Gini coefficient for income inequality increased from 0.24 in the early 1980s to 0.36 in the 2021/22, an increase in the degree of income inequality. Those on lower incomes tend to have a higher marginal propensity to consume (MPC) than those on high incomes. This is because those on low incomes have to spend most of any extra £1 earned on necessities to make ends meet rather than save. Hence, income inequality in the UK may lead to a fall in overall consumption, as lower-income households spend a lot less and higher-income households spend only slightly more. As consumption is a component of aggregate demand (AD = C + I + G + X – M), AD shifts left from AD to AD1. Income inequality can also cause social unrest, such as during the French Revolution. More people may look to crime to survive or seek to protest unfairness. This could reduce investor confidence to invest due to the risk of capital being destroyed, reducing investment. This could shift LRAS left to LRAS1. Altogether the economic growth rate falls from Y to Y1, reducing real incomes and meaning cannot afford as many goods and services, lowering living standards across the income distribution.
Evaluation point 1
However, as incomes rise, the MPC may fall but the marginal propensity to save (MPS) rises. Thus, income inequality could increase total savings. So banks have more funds to lend out to firms, increasing the supply of loanable funds. The development of the UK’s financial services sector, making up nearly 9% of UK GDP, could be encouraged by these extra savings. So firms can borrow to invest more easily and more cheaply. Higher investment boosts AD. This could cancel out the effect of falling consumption, minimising the extent to which income inequality reduces the rate of economic growth.
Analysis point 2
Income inequality may provide an incentive to work, train and hence allocate workers efficiently between sectors in the face of changes to market conditions. For example, suppose there is a shortage of workers in an industry, such as the shortage of 100,000 lorry drivers during the Covid-19 pandemic. This excess demand is the distance q2-q in the diagram below. Then the rationing function means that the wage rises to eliminate excess demand in the lorry driver market. This wage rise, relative to other sectors, generates income inequality, and can help to eliminate the worker shortage. The rising wage incentivises lorry drivers to supply more labour. The rising wage may also act as a signal for people working in other sectors such as hospitality to retrain as lorry drivers, further boosting labour supply until the shortage is eliminated. Altogether labour supply extends from q to q1 and the wage rises from w to w1. Lorry drivers wages increased by 5.7% compared with a rise of 0.8% in wages for other sectors from February to July 2021. This shows the ability of wage gaps to reduce labour shortages.
Evaluation point 2
However, in practice, workers may be geographically immobile, meaning they cannot move location due to family ties or high house prices. House prices in London are 245% higher than those in the North East of England as of January 2026, making it costly to move from the North East to London for work. This may make the wage elasticity of labour supply more inelastic. So the incentive and signalling functions of wages may be weak: a given increase in wage may only lead to a proportionally smaller increase in labour supply. So labour shortages may remain for longer and some market failures in the labour market may remain.
Conclusion
Overall, it is likely that the negative effects of extreme income inequality outweigh the positives. The fall in AD from falling consumption and social unrest is likely to outweigh the benefit of higher saving. Savings may be used to fund investments abroad such as in US tech companies, rather than being invested domestically. So income inequality is likely to reduce the domestic rate of economic growth. However, pay gaps can boost incentives to retrain and work, so some degree of income inequality is beneficial. The consequences of inequality depend on the extent of government intervention. The government may need to use progressive taxation, as is broadly the case with (marginal) income tax rates in the UK increasing from 0% to 45% as incomes rise. This is to reduce the degree of post-tax income inequality, while still allowing some inequality to create incentives to work and train.
Commentary on the answer
This answer contains all the features of a top level answer:
- Well-organised response with points that are relevant to the question.
- Good use of technical terms, such as marginal propensity to consume, rationing function, geographical immobility, wage elasticity of supply.
- Relevant economic theory has been applied to the question.
- Effective use of real world examples throughout.
- Extended chains of reasoning that are relevant to the question. In particular here, on aggregate demand and the wage mechanism.
- Evaluation that explains weaknesses in the previous analysis points, in a way that is linked back to the question.
- A conclusion that comes to a judgement, without just repeating existing arguments. The conclusion tries to weigh up whether these arguments are strong or weak, and what else the answer may depend on (government intervention).
As a result, this answer would likely score full marks or close to this.
Related AQA Economics style resources
For more A-Level Economics AQA style resources, click the blue buttons below:
About the author
