1.7 The distribution of income and wealth; poverty and inequality

Question 1

Income

Answer 1

personal or household income in the flow of money a person or household receives in a particular time period`

Question 2

Wealth

Answer 2

Personal wealth in the stock of everything which has value that a person or household owns at a particular point in time

Question 3

Distribution of income

Answer 3

how income is divided between the rich and poor, or between different groups in society, e.g. on a regional, age, or gender basis

Question 4

Distribution of wealth

Answer 4

how wealth is divided between the rich and poor, or between different groups in society, e.g. on a regional, age, or gender basis

Question 5

Lorenz curve

Answer 5

a graph on which the cumulative percentage of total national income or wealth is plotted against the cumulative percentage of population (ranked in increasing size of share). The extent to which the curve dips below a straight diagonal line indicated the degree on inequality of distribution.

Question 6

Gini coefficient

Answer 6

measures the extent to which the distribution of income or wealth among individuals or households within an economy deviates from a perfectly equal distribution

Question 7

What do different Gini coefficients suggest about income inequality?

Answer 7

• the higher the number, the more unequal the distribution of income
• A value of 0 indicates perfect equality, so everyone has the same income and wealth.
• A value of 1 is perfect inequality i.e. all of the wealth in the country is concentrated in the hands of one individual or household.

Question 8

How is the Gini coefficient calculated?

Answer 8

the ratio of the area between the perfect equality line and the Lorenz curve

Question 9

Equality

Answer 9

everyone is treated exactly the same. A completely equal distribution of income means that everyone has the same income.

Question 10

Equity

Answer 10

everyone is treaty fairly

Question 11

Income tax threshold

Answer 11

the level of income above which people pay income tax

Question 12

Causes of income inequality (5)

Answer 12

• inequality in wages
• welfare payments and taxes
• unemployment
• changes to the UK tax system
• inequality between countries

Question 13

Impacts of income and wealth inequality (6)

Answer 13

• Monopolies can exploit consumers with higher prices, and exploit their consumers with lower wages
• Those who inherit lots have more wealth and can access the best education and therefore the best jobs
• There can be income redistribution and wage equality through government intervention.
• Inequality could discourage and demotivate those on lower incomes from participating in society.
• An unequal distribution can lead to negative externalities, such as social unrest.
• an individual’s ability to consume goods and services depends upon their income and wealth and an inequitable distribution of income and wealth is likely to lead to a misallocation of resources and hence market failure

Question 14

Poverty

Answer 14

the state of being poor and not having enough money or income to meet basic needs

Question 15

Absolute poverty

Answer 15

the state of being deprived of basic human needs, including food, safe drinking water, sanitation facilities, health, shelter, education, and information

Question 16

Relative poverty

Answer 16

the state of having an income below a specified proportion of average income

Question 17

Food desert

Answer 17

an area that has inadequate access to affordable and nutritious food. These areas tend to be inhabited by low income households with reduced mobility, which makes them a less attractive market for large supermarket chains.

Question 18

Medical desert

Answer 18

an area that has inadequate access to affordable, effective healthcare

Question 19

Transit desert

Answer 19

an area that has inadequate access to public transportation and possible poor bike, pavement, or road infrastructure. The lack of transportation options present have negative effects on labour mobility, health, education, and economic mobility

Question 20

Banking desert

Answer 20

an area that has inadequate access to cash cheques, establish accounts, obtain loans, and withdraw cash. These areas tend to be inhabited by low-income households, which makes them a less attractive market for financial institutions

Question 21

Causes of poverty (7)

Answer 21

• inequality in wages and employment
• welfare payments
• taxes
• health issues
• wars and conflicts
• corruption and political oppressions
• natural disasters

Question 22

Impacts of poverty (5)

Answer 22

• health problems
• social unrest
• poor sanitation
• reduced access to education
• hindered economic growth

Question 23

National Minimum Wage (NMW)

Answer 23

a minimum wage or wage rate that must by law be paid to employees, though in many labour markets the wage rate paid by employers is above the national minimum wage

Question 24

Wages council

Answer 24

a series of boards in the UK with one existing for each low-pay industry with each having the authority to raise or lower the minimum wage for that industry (abolished in 1993)

Question 25

progressive tax

Answer 25

a tax when, as income rises, a greater proportion of income is paid in taxation

Question 26

Proportional tax

Answer 26

a tax when, as income rises, an equal proportion of income is paid in taxation

Question 27

Regressive tax

Answer 27

a tax when, as income rises, a smaller proportion of income is paid in taxation

Question 28

Income tax

Answer 28

a direct tax levied on wages, pensions, benefits, investment income, and income from rent

Question 29

Value Added Tax (VAT)

Answer 29

an indirect tax paid at a rate of 20% on most goods and services. This is an example of a tax on expenditure

Question 30

Inheritance tax

Answer 30

a direct tax which is paid on the value of someone’s estate after they die. This is an example of a tax on wealth.

Question 31

Corporation tax

Answer 31

a direct tax on company’s profits. This reduces the size of dividends paid to shareholders. This is an example of a tax on income.

Question 32

Means-tested benefits

Answer 32

the ability to claim these benefits depends on the person’s income or ‘means’ (e.g. income support)

Question 33

Universal benefits

Answer 33

benefits claimable of right and not dependant on a person’s income (e.g. child benefits)

Question 34

Laffer curve

Answer 34

the relationship between the government’s total tax revenue and the average income tax rate

Question 35

Describe the relationship between tax revenue and income tax rate

Answer 35

• At an income tax rate of 0%, so no tax revenue is collected.
• At an income tax rate of 100% no-one bothers to work, so no tax revenue is collected.
• If tax cuts cause income to rise (due to incentives) proportionally more than the tax rate has fallen, then tax revenues will increase.
• If tax increases cause income to fall (due to incentives) proportionally more than the tax rate has risen, then tax revenues will decrease.

Question 36

Marginal income tax rate

Answer 36

the tax rate levied on the last pound of income received

Question 37

Fiscal drag

Answer 37

occurs when the government fails to adjust progressive income tax rates (or personal tax allowances) in line with inflation, meaning people end up with less real disposable income

Question 38

Earnings trap

Answer 38

occurs when there is an overlap between the income tax threshold and the means-tested welfare benefits ceiling. Low paid workers may find that any increase in their wages results in little increase, no change or a fall in their disposable income

Question 39

Unemployment trap

Answer 39

occurs when people are better off out of work, claiming benefits than in low-paid jobs and paying income tax, NI contributions and losing some of their means-tested benefits

Question 40

Net advantage

Answer 40

the sum of the monetary and non-monetary considerations of working

Question 41

Inflation

Answer 41

a persistent or continuing rise in the average price level

Question 42

Disposable income

Answer 42

income over a period of time including earnings and benefits, less direct taxes