🎓 Skills
Workers with more education, training and skills are more productive, and fewer people can do their jobs. So they usually earn higher wages. Unskilled workers can be replaced easily, so they usually earn less.
Living Standards » Comparing Living Standards and Income Distribution
What you'll learn this session
Study time: 30 minutes
Cambridge spec: 5.1.2
- What income distribution means, and how it can be more equal or more unequal
- Why living standards and incomes differ between people and regions within a country
- Why living standards differ between countries
- How to explain these differences in an exam answer
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Unlock This CourseWhat is income distribution?
In the last lesson you saw that real GDP per head is an average. An average can hide a lot. Two countries can have the same real GDP per head, but in one almost everyone earns a similar amount, while in the other a few people earn a huge amount and most earn very little. To see that difference we look at income distribution.
Key terms:
- Income distribution: how the total income of a country is shared out between its people or households.
- More equal distribution: incomes are fairly close together, so each group gets a share close to its share of the population.
- More unequal distribution: incomes are far apart, so a small group gets a large share of the income and a large group gets a small share.
Here is a made-up example. Lendara and Torvessa each have 100 households and the same total income of $10 million. The table shows how it is shared.
| Group of households | Share of income in Lendara | Share of income in Torvessa |
|---|---|---|
| Poorest 50 households | 40% | 10% |
| Middle 40 households | 45% | 30% |
| Richest 10 households | 15% | 60% |
In Lendara the poorest half of households get 40% of the income and the richest tenth get 15%. That is fairly equal, because each group's share is not far from its share of the households. In Torvessa the poorest half get only 10%, while the richest tenth get 60%. That is very unequal. Average income is the same, but 90 of the 100 households in Torvessa share only 40% of the income, so most people there are likely to have lower living standards.
Worked example
Total income in Kesmora is $200 million. The richest 20% of households receive $120 million. Their share is $120 million ÷ $200 million × 100 = 60%. The other 80% of households share the remaining 40%. Because a fifth of households get three fifths of the income, the distribution is unequal.
Differences within a country
Living standards and incomes are not the same for everyone in one country. These are the main reasons for the differences.
🗺 Region
Some regions have more jobs, better roads, more firms and better services. People there tend to earn more than people in regions with few firms and poor transport.
🏙 Urban and rural
Cities often have more firms, higher-paid jobs, and nearer schools and hospitals. Rural areas often depend on farming, which may pay less, and services can be far away.
💰 Wealth
Wealth means assets such as property, shares and savings. People who own wealth can earn extra income from it, for example rent or interest, and can pay for education for their children. This can widen the gap further.
These reasons often link together. A person with few skills living in a poor rural region has a low income, and may also have little wealth to help them improve their situation. A skilled person in a city may earn a high wage, save, and build up wealth, which gives them even more income.
Differences between countries
Living standards also differ a lot between countries. Here are the main reasons.
💲 Income
Countries with higher national income per head have more to spend on goods, services, homes and public services. Higher incomes allow people to buy more and save more.
🏥 Healthcare
Countries with more doctors, hospitals and clean water have healthier people who live longer. Healthy workers can work more and produce more, which can raise incomes.
📚 Education
Countries that educate more of their people have a more skilled workforce. Skilled workers are more productive and can earn more.
⚖ Political stability
Where there is peace and stable government, firms are willing to invest and people can plan for the future. War or constant political change harms output, damages buildings and drives away investment.
Again these reasons link together. A country with higher income can pay for more schools and hospitals. Better education and health then raise productivity, which raises income further. In this way, a low-income country can be held back, and a high-income country can pull further ahead.
Worked example
Mirabel and Valtoria have the same population. Mirabel has real GDP per head of $25,000, 4 doctors for every 1,000 people and a stable government. Valtoria has real GDP per head of $2,000, 0.3 doctors for every 1,000 people and a long civil conflict. Living standards are likely to be much higher in Mirabel. Higher income pays for more services, more healthcare helps people stay well and work, and stability encourages investment. In Valtoria, conflict damages production and discourages firms from investing.
Within or between? Do not mix them up
Income distribution compares people inside one country. Differences in living standards between countries compare whole countries. Both are examined, so read the question carefully. A country can have high real GDP per head but very unequal income distribution. In that case, many of its people may still have low living standards.
Common mistakes
Students say that equal distribution means everyone earns exactly the same. It only means that incomes are closer together. Another slip is saying that a high average income means high living standards for everyone, when the distribution may be unequal. Finally, many answers just list reasons such as "education" without explaining how education leads to higher income, which is what earns the marks.
Exam-style question
Orvelia is a middle-income country. Most of its factories and offices are in the capital city, while many people in the countryside work on small farms. Workers with a university degree earn about four times as much as workers with no qualifications. A government report says that income is very unequal in Orvelia.
(a) Define income distribution. [2 marks]
(b) Explain two reasons why incomes differ between people within Orvelia. [4 marks]
(c) Explain one reason why living standards may be lower in a country with political instability. [3 marks]
(d) Discuss whether an increase in average income will always raise living standards for all people in a country. [6 marks]
Model answer
(a) Income distribution is how the total income of a country is shared out (1) between its people or households (1).
(b) One reason is skills (1): workers with degrees are more productive and fewer people can do their jobs, so they earn higher wages (1). Another reason is urban and rural location (1): most firms are in the capital, so city workers have more jobs and higher pay, while rural farmers earn less (1).
(c) Political instability discourages firms from investing (1) because they fear losing their property or sales (1), so there are fewer jobs and less output, which lowers incomes and living standards (1).
(d) An increase in average income may raise living standards because people can afford more goods and services (1), and the government has more tax to spend on schools and hospitals (1). However, if the extra income goes mainly to the richest households (1), most people may see little or no change (1). Rural or unskilled workers may not benefit at all (1). Overall, a rise in average income does not guarantee higher living standards for everyone, because it depends on how the income is distributed (1).
Exam tip
In an Explain question, give the reason and then say how it leads to a different income or living standard. In a Discuss question, give both sides and finish with a clear conclusion that answers the question.