Circular Flow and Inequality
The Market’s Inability to Achieve Equity
AO2·Diagram required·HL
Syllabus requirement
Using the circular flow of income model to illustrate how income disparities arise in free market systems.
Assessment objectives
AO2 Application and Analysis
Required diagram: Diagram of the circular flow of income model, showing household and firm sectors, and how unequal factor ownership and income distribution result in inequity.
Higher LevelThis topic is assessed at HL.
Summary
This topic uses the circular flow of income model to show how income and wealth are generated and why free markets often produce unequal distributions. It explains leakages (savings, taxes, imports) and injections (investment, government spending, exports) and how imbalances between them affect national income, employment and inequality. The chapter links unequal factor ownership, differences in human capital, inheritance and tax systems to persistent income and wealth gaps within and between countries.