16) poverty and inequality

Question 1

income is a …

Answer 1

flow - continuous movement in and out.

Question 2

how do we earn income?

Answer 2

We earn income for supplying factors of production e.g wages for working, profit for enterprise, interest for our capital, rent for assets

Question 3

wealth is a…

Answer 3

stock- more static. It can be inherited or built up over time.

Question 4

what are examples of wealth?

Answer 4

E.g. property value, savings, pension funds, etc

Question 5

in every country both income and wealth are distributed…

Answer 5

unevenly, e.g. the richest 5% owning 50% of the country

Question 6

what is the UK governments target relating to poverty and inequality?

Answer 6

In the UK, the government has a target of a more even distribution of income

Question 7

how does the government attempt to achieve its target of a more even distribution of income?

Answer 7

Most commonly, this is done by progressive taxation systems (high earners pay a higher %), using this to pay for generous benefits system (e.g. pensions for OAPs, unemployment, sick pay benefits etc, free health care and education at point of use.

• This benefit system ensures that the UK has little if any absolute poverty.

Question 8

what is absolute poverty?

Answer 8

• Absolute poverty (mainly in developing and emerging economies) is when households have to survive of US$2
a day or less.

Question 9

there is a lot of… poverty in the UK

Answer 9

relative

Question 10

what is relative poverty?

Answer 10

Relative poverty is when households earn 60% (or less) of the median income.

Question 11

in the UK what is the median income?

Answer 11

about £36,000, so households earning less than £20,000
exist in relative poverty.

Question 12

what does absolute poverty mean in terms of lifestyle?

Answer 12

• Absolute poverty means you cannot meet basic needs. With relative poverty you may meet most basic needs but can’t afford much else

Question 13

how is income equality measured?

Answer 13

Income inequality is measured using the GINI co-efficient.

Question 14

what values are involved in the GINI coefficient?

Answer 14

This is a value of between 0 (everybody equal) and 1 (where 1 person has everything and everyone else nothing. The closer to 1, the more unequal.

Question 15

what do the most equal countries in the world score and what does the UK score?

Answer 15

The most equal countries in the world (e.g. Norway, score about 0.26. The most unequal (eg South Africa) score about 0.65. The UK is about 0.34.

Question 16

what curve shoes inequality?

Answer 16

The Lorenz Curve

Question 17

analyse the Lorenz Curve

Answer 17

• The 45 degree line is full equality. In other words,
  50% of the population has 50% of the income

• The further to the right the bow goes, the more unequal the distribution of income

• In this example, 90% of the population earns 55% of income. If the bow was further right for example, 90% of the population might earn only 30% of the income

Question 18

“it depends on the type of poverty”

Answer 18

depends on the type of poverty. Absolute/extreme poverty is often caused by the nature of developing and emerging countries. For example; there might be limited access to key resources like clean water. It could be caused by factors unique to a particular country such as extreme weather, wars, natural disasters or cultural/religious beliefs. It also could be a legacy of historical neglect/exploitation of a country. With almost absolute/extreme poverty, there will be much evidence of government failure; this will be a common denominator in absolute/extreme poverty throughout the world.

Question 19

how is relative poverty closely linked to inequality?

Answer 19

2.Relative poverty is closely linked to inequality. High income inequality will create more households in relative poverty. Any cause of income inequality (see below) may cause relative poverty. Relative poverty is also caused by government failure e.g. decisions made to please powerful well-off minorities whilst ignoring the poorer end of society.

Question 20

consequences of extreme/absolute poverty

Answer 20

Consequences of extreme/absolute poverty: Firstly, it leads to social problems like crime, poor health etc. Secondly, it means that the country will not be producing to its potential (PPF diagram opportunity). This is because those in poverty are less likely to prioritise education, being more concerned with short-term objectives like earning a basic income in order to survive. This effect could be exacerbated by a “brain-drain” from the country, as many of the brightest and fittest members of the community look to emigrate. Finally, high levels of poverty may make it more difficult for a country to attract FDI- foreign MNCs may not feel that the labour force are capable of meeting their requirements.

Question 21

causes of income inequality:
(just a list)

Answer 21

1) The Labour Market
2) Taxation policies
3) government intervention
4) Wealth inequalities create income inequalities

Question 22

causes of income inequality: labour market

Answer 22

the more flexible the labour market (easier to hire and fire) greater income inequalities tend to be, Countries with strong trade union presence are often more equal as the unions fight for a smaller pay gap between top and bottom

Question 23

causes of income inequality: Taxtation policies

Answer 23

more emphasis there is on progressive taxation, the less the inequalities. Countries with more proportional or regressive systems tend to have higher inequalities

Question 24

causes of of income inequality: government intervention

Answer 24

like the UK and the Scandinavian countries have strong welfare states and wide access to free (at the point of use) health and education systems. In countries like the USA, these systems are not as robust so there may be more inequality

Question 25

causes of income inequality: wealth inequalities

Answer 25

Wealth inequalities create income inequalities. Wealthier households can invest their wealth in more profitable ways (e.g. shares/pension schemes/property for renting out- therefore earning more income, often at the expense of less wealthy households.

Question 26

what are the causes of wealth inequality?

Answer 26

i) income inequality causes wealth inequality for obvious reasons)
ii) Government failure (e.g. corruption- Putin’s Russia is a classic example of this
iii) Also, cultural factors-e.g. in the UK, the class system meaning that ownership of large amounts of land and property is in relatively few hands.

Question 27

consequences of inequality/relative poverty:
(list points)

Answer 27

1) social problems
2) economic problems

Question 28

Consequences of inequality/relative poverty: social problems

Answer 28

e.g. crime, structural unemployment, uneven standard of infrastructure/housing/opportunities etc

Question 29

Consequences of inequality/relative poverty: economic problems

Answer 29

can lead to low worker morale, less incentive to work (rewards are seen to go elsewhere); low productivity; therefore, lower economic growth, less government revenue etc. In short, inequalities can be self-perpetuating.

Question 30

why can inequality itselfbe argued as not bad?

Answer 30

No inequality would be a nightmare scenario (e.g. everybody earning the same income, living in the same type of accommodation) - we do need to aspire to making ourselves, better, richer etc-some inequality is inevitable- just not too much!

Question 31

its depends on the size of the inequalities…

Answer 31

with similar, opportunity cost of reducing inequalities (Laffer Curve?); economic position (being relatively poor in the UK may be better off than somebody in the top quintile of a developing country.