2.4-2.5 Flashcards
What is income
Income is a flow of money earned by people:
1.Wages and salaries
2.Profits flowing to businesses
3.Rental income
4.Interest paid on savings
5. Money paid to people receiving welfare benefits
What is wealth
Wealth is a measure of assets owned by someone
1.Savings held in bank deposit accounts
2.Ownership of shares of listed companies
3.Property such as land and houses
4.Wealth held in bonds
5.Pension and life assurance schemes
Why is wealth important
-Wealth generates income for people who own land, shares and other assets in the form of rent, profits and dividends.
-An increasing proportion of GDP is earned in this way rather than through wages
-Wealth can be passed on to children
The benefits of inequality
-Incentive effect- If you get paid you work harder
-Entrepreneurs require rewards-necessary to encourage entrepreneurs to take risks and set up new business
-Trickle down effect-If people earn extra income, it’ll trickle down
-Fairness- People deserve to keep their income
The problems of inequality
-Inequality stifles growth. If large numbers of the population are in poverty then there will be a lack of consumption affecting total aggregate demand
-Inequality Decreases Education. Unequal societies tend to underinvest in education, leading to a lack of productivity
-Inequality Decreases Health. Poorer people have a lower life expectancy and more ill health that places a burden on health spending.
Causes of inequality
-Changes in the highest rates of income tax
-Increased globalisation leading to a fall in wages for low skilled workers
-Increase of multinational companies that minimise their taxes through the use of tax havens
-In recent years low interest rates and quantitative easing has resulted in high asset prices for houses and shares
How to reduce inequality
1.Increasing progressive taxes-will take more tax from those on high income levels
2.National minimum wage
3.Universal basic income- a weekly basic living standard
4.Reduce unemployment
Equilibrium means
-Equilibrium occurs when the quantity of real GDP demanded equals the quantity of real GDP supplied at the point of intersection of the AD curve and the AS curve.
3 types:
-Full employment equilibrium
-Below full employment equilibrium (deflationary)
-Above full employment equilibrium (inflationary)
The output gap is
The difference between the actual level of GDP and its estimated potential level. It is usually expressed as a percentage of the level of potential output.
Negative Output Gap
When the level of actual GDP is less than potential GDP
Some factor resources are under-utilized e.g. demand-deficient unemployment
Main problem is likely to be higher unemployment and possible deflation risk
Positive output gap
Actual GDP is greater than the estimated potential GDP
Some resources working beyond usual capacity (shift work & overtime)
Main problem is rising demand-pull and cost-push inflationary pressures
What is the multiplier
When an increase in spending (C, I, G, or net X) leads to a larger overall increase in GDP than the initial change in spending
This is because the initial spending will impact on the circular flow of income- resulting in more spending and income for others in the economy
The size of the multiplier effect depends on the how quickly income leaks from the circular flow
Why the multiplier effect happens
-A change in one of the components of AD can lead to a multiplied final change in the equilibrium level of GDP
Positive Multiplier
-when an initial increase in an injection (or a decrease in leakages) leads to a greater final increase in real GDP
Negative Multiplier
-When an initial decrease in an injection (or an increase in leakages) leads to a greater final decrease in real GDP
Formula for the multiplier
1/ 1-MPC
1/ MPS + MPT + MPM
(savings, tax, imports)
(MPC) marginal propensity to consume
what proportion of extra income is spent by consumers
