3.3 Fair distribution of income

Question 1

Define distribution of income

Answer 1

This describes how income is divided between individuals and households in a country

Question 2

Define income

Answer 2

A flow of money over time, often as a reward for use of a factor of production

Question 3

Define wealth

Answer 3

The monetary value of all the assets owned by an individual person, firm or country at a specific time

Question 4

What are the types of income?

Answer 4

• Wages
• Benefits
• Interest
• Profits
• Rent

Question 5

What is the difference between income and wealth?

Answer 5

• Income is a flow of money overtime (e.g. the amount of money an individual earns in a year)
• Wealth is the monetary value of assets owned at a specific time (e.g. the total value of all properties owned by a landlord at a point in time)

Question 6

How do you calculate income and wealth?

Answer 6

1- Identify whether the items are examples of income or wealth
2- Split the items into two lists (one for income and one for wealth)
3- Add together all the current monetary values of income (this gives an individual’s total income)
4- Add together all the current monetary values of wealth (this gives an individual’s total wealth)

Question 7

What are the causes of differences in distribution of income?

Answer 7

• Wage differences
• Benefit reliance: state benefits are usually lower than wages
• Age: people under the age of 25 have less experience, therefore may be paid less. Older people may be retired and pensions are likely to be less than previous wage

Question 8

What are the causes of differences in distribution of wealth?

Answer 8

• Inheritance: some families own more possessions which can be passed onto the next generation
• Property: people with enough income may decide to buy various properties e.g. to rent out
• Savings: some people may decide to save some of their income, receiving interest which may increase their wealth overtime

Question 9

What are the benefits of inequality?

Answer 9

• Trickle-down effect: if some people are on higher incomes, they may spend more in an economy/set up businesses, which may lead to more income for other people
• Incentives: the possibility of a higher income may motivate people to work harder, which may lead to greater productivity in an economy

Question 10

What are the costs of inequality?

Answer 10

• Housing: people on low incomes may not be able to afford to buy housing or may have to live in poor-quality housing
• Health: people on low incomes may not be able to afford food or medicines, so they may be likely to have health problems and a lower life expectancy
• Education: in countries with no state education, families on low income may not be able to afford education, which can lead to fewer skills, which results in a lower wage and continues the poverty cycle.