2.7 Income distribution and welfare Flashcards
What is the difference between income and wealth?
Income refers to the flow of money received over a period, while wealth refers to the stock of assets owned at a point in time.
Income is typically measured as earnings from work, investments, or other sources, whereas wealth encompasses property, stocks, and savings.
What is the policy objective of a more even distribution of income?
To reduce income inequality and enhance social welfare.
A more equitable distribution can lead to improved social cohesion and economic stability.
Define absolute poverty.
Absolute poverty is the condition where an individual lacks the minimum amount of income needed to secure the basic necessities of life.
This often refers to a specific income threshold, such as the international poverty line.
Define relative poverty.
Relative poverty is when an individual’s income is significantly less than the average income in their society, affecting their ability to participate in normal activities.
It focuses on social exclusion rather than just basic survival.
What is the Gini coefficient?
The Gini coefficient is a statistical measure of income inequality within a population, ranging from 0 (perfect equality) to 1 (perfect inequality).
A Gini coefficient of 0.25 indicates a relatively equal distribution, while 0.5 indicates more inequality.
How is the Lorenz curve used in economics?
The Lorenz curve illustrates the distribution of income or wealth within a society, showing the proportion of total income earned by cumulative percentages of the population.
It visually represents inequality; the further the curve is from the diagonal line, the greater the inequality.
What does a Gini coefficient of 0 indicate?
It indicates perfect equality in income distribution.
All individuals have the same income.
What does a Gini coefficient of 100 indicate?
It indicates perfect inequality, where one individual has all the income.
In this scenario, all others receive nothing.
What is disposable income?
Disposable income is the amount of money that households have available for spending and saving after income taxes have been deducted.
It reflects the financial resources available for consumption and investment.
What is the median household income?
The median household income is the income level at which half of the households earn more and half earn less, providing a good indication of the standard of living.
It is less affected by extreme values than the mean income.
What is horizontal equity?
Horizontal equity is the principle that individuals in similar circumstances should be treated equally, particularly in terms of income and taxation.
For instance, families with similar income levels should receive the same welfare benefits.
What is vertical equity?
Vertical equity is the principle that individuals with different circumstances should be treated differently, often justifying higher taxes on the wealthy to support the less fortunate.
This principle supports the redistribution of income to promote fairness.
What is the headcount ratio?
The headcount ratio is the proportion of a population that is considered to be living in poverty based on a specific income threshold.
It is a simple measure of poverty that does not account for the depth of poverty.
Fill in the blank: The _______ poverty line is an international benchmark used to measure absolute poverty.
international
What is the definition of unemployment trap?
The unemployment trap refers to the situation where individuals choose not to work because the financial benefits of staying unemployed are greater than those of working.
This can lead to long-term dependency on welfare benefits.
What does fiscal drag refer to?
Fiscal drag occurs when tax thresholds are not adjusted for inflation, causing individuals to pay a higher proportion of their income in taxes as their wages increase.
This can result in a greater tax burden on middle-income earners.
What is the poverty cycle?
The poverty cycle is a self-perpetuating cycle where poverty leads to lack of education and skills, resulting in low income and continued poverty.
Breaking this cycle often requires intervention through education and economic opportunities.
How can a government alleviate poverty? Name one method.
Increasing the minimum wage.
This helps ensure that workers earn a living wage, reducing in-work poverty.
What is the significance of the Multidimensional Poverty Index?
The Multidimensional Poverty Index measures poverty through multiple deprivations in health, education, and living standards, rather than just income.
This approach provides a broader understanding of poverty.
What is the relationship between economic growth and poverty reduction?
Economic growth can lead to poverty reduction if the benefits are equitably distributed; however, growth alone does not guarantee reduced poverty.
Inequality in growth can exacerbate poverty levels.
