1.7 The distribution of income and wealth; poverty and inequality Flashcards
Income
personal or household income in the flow of money a person or household receives in a particular time period`
Wealth
Personal wealth in the stock of everything which has value that a person or household owns at a particular point in time
Distribution of income
how income is divided between the rich and poor, or between different groups in society, e.g. on a regional, age, or gender basis
Distribution of wealth
how wealth is divided between the rich and poor, or between different groups in society, e.g. on a regional, age, or gender basis
Lorenz curve
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.
Gini coefficient
measures the extent to which the distribution of income or wealth among individuals or households within an economy deviates from a perfectly equal distribution
What do different Gini coefficients suggest about income inequality?
- 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.
How is the Gini coefficient calculated?
the ratio of the area between the perfect equality line and the Lorenz curve
Equality
everyone is treated exactly the same. A completely equal distribution of income means that everyone has the same income.
Equity
everyone is treaty fairly
Income tax threshold
the level of income above which people pay income tax
Causes of income inequality (5)
- inequality in wages
- welfare payments and taxes
- unemployment
- changes to the UK tax system
- inequality between countries
Impacts of income and wealth inequality (6)
- 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
Poverty
the state of being poor and not having enough money or income to meet basic needs
Absolute poverty
the state of being deprived of basic human needs, including food, safe drinking water, sanitation facilities, health, shelter, education, and information
Relative poverty
the state of having an income below a specified proportion of average income
Food desert
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.
Medical desert
an area that has inadequate access to affordable, effective healthcare
Transit desert
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
Banking desert
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
Causes of poverty (7)
- inequality in wages and employment
- welfare payments
- taxes
- health issues
- wars and conflicts
- corruption and political oppressions
- natural disasters
Impacts of poverty (5)
- health problems
- social unrest
- poor sanitation
- reduced access to education
- hindered economic growth
National Minimum Wage (NMW)
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
Wages council
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)
progressive tax
a tax when, as income rises, a greater proportion of income is paid in taxation
Proportional tax
a tax when, as income rises, an equal proportion of income is paid in taxation
Regressive tax
a tax when, as income rises, a smaller proportion of income is paid in taxation
Income tax
a direct tax levied on wages, pensions, benefits, investment income, and income from rent
Value Added Tax (VAT)
an indirect tax paid at a rate of 20% on most goods and services. This is an example of a tax on expenditure
Inheritance tax
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.
Corporation tax
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.
Means-tested benefits
the ability to claim these benefits depends on the person’s income or ‘means’ (e.g. income support)
Universal benefits
benefits claimable of right and not dependant on a person’s income (e.g. child benefits)
Laffer curve
the relationship between the government’s total tax revenue and the average income tax rate
Describe the relationship between tax revenue and income tax rate
- 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.
Marginal income tax rate
the tax rate levied on the last pound of income received
Fiscal drag
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
Earnings trap
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
Unemployment trap
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
Net advantage
the sum of the monetary and non-monetary considerations of working
Inflation
a persistent or continuing rise in the average price level
Disposable income
income over a period of time including earnings and benefits, less direct taxes
