3.4 Economics Of Inequality And Poverty

Question 1

Relationship between equality and equity

Answer 1

Equity is interpreted as greater equality

Question 2

What is economic inequality

Answer 2

Refers to the degree that people in a population differ in their ability to satisfy their economic needs

Question 3

What are 2 two MAIN sources of economic inequality and explain it

Answer 3

Unequal distribution of income - arises from differences in how evenly income is disturbed in a population

Unequal distribution of wealth - arises from differences in the amount wealth people own e.x money, houses, land and more

Question 4

How to measure economic inequality

Answer 4

Lorenz curve and Gini coefficient

Question 5

What is the Lorenz curve

Answer 5

Used to show the degree of income inequality in an economy

Question 6

What is gini coefficient + the formula

Answer 6

A summary measure of income inequality using the information contained in the Lorenz curve of an economy

(Area between diagonal and Lorenz curve) / (entire area under diagonal) = A / A + B

Value between 0 and 1 - the lower the value the greater the income equality

Question 7

What is poverty

Answer 7

Refers to an inability to satisfy consumption needs; 2 types absolute and relative

Question 8

What is absolute poverty

Answer 8

A situation where a person does not have enough income to meet basic human needs

Question 9

What is relative poverty

Answer 9

refers to an individual earning low income relative to others in the country

Question 10

How to measure absolute poverty

Answer 10

is identified when people earn below the poverty line (minimum income level)

The amount of poverty is found by taking the percentage of a population whose income falls below the poverty line

Question 11

Another way to measure poverty (single indicator)

Answer 11

Minimum income standards - refers to a method to measure poverty

Method consists of research on what people in a population believe are the essential for a minimum acceptable standard of living

MIS then produced budgets for a basket of goods - based on info it calculates the minimum income required for different families

Question 12

Composite indicates to measure poverty

Answer 12

Multidimensional poverty index (MPI)

Question 13

Explain the MPI

Answer 13

There are 3 main dimensions: health, education and standards of living – each of these factors has an equal weight in indicating poverty

A person is considered to be multidimensionally poor if they experience deprivation in at least 1/3 of the indicators

Question 14

Difficulties in measuring poverty

Answer 14

There are many different categories of poverty, and they may vary in definition between NGOs, Governments etc. This makes international comparisons difficult

Conducting surveys on poverty requires extensive funding as it is a laborious task and surveys do not include the homeless and survey is subjective

Many Governments opt to lower the poverty line to ‘lift’ people up from poverty

Question 15

Causes of economic inequality and poverty

Answer 15

Inequality of opportunities - Different people are born into different environments and circumstances, which they cannot fully control - factors such as education and healthcare affect one’s long–term ability to be equal in economic status as another person from another location

Different levels of human capital - refers to skills, education and good health -low levels of education and skills translate to lower incomes

Different levels of resource ownership - easier to increase wealth if inherited

Discrimination

Unequal status and power

Globalization and technological change - increases FDI, increasing incomes but tend to increase for skilled workers, with technological improvements, there is increased structural unemployment, as skilled workers are able to dominate and increase their incomes in the quaternary sector

Market-based supply-side policies - greater unemployment or lower incomes for lower-skilled workers - e.x deregulation, reeducation in minimum wage and more

Government tax and benefits policies - people on low incomes rely on transfer payments - if these are reduced by government then low income groups forced into poverty

Question 16

Impact of income and wealth inequality

Answer 16

Economic growth - in the long run, it will lead to lower
productivity, education and skills within the workforce, as fewer people would have access to facilities to
improve those factors, and therefore, improve the quality of the factor of production

low living standards - low incomes result in poverty, resulting in poorer health, lack of education and healthcare

social and political stability - income inequalities create societies that are divided, reduces sense of social solidarity

Question 17

Policies to reduce income and wealth inequalities and poverty

Answer 17

Taxation

Transfer payments

Investment in human capital

Minimum wages and price control

Question 18

What are direct taxes

Answer 18

Taxes paid directly to the government

For example:
- personal income taxes - taxes paid by household
- corporate income taxes - taxes pain by businesses

Question 19

What are indirect taxes and 2 types

Answer 19

Taxes on spending on good and services

For example:
- sales tax - taxes on the spending/sale of goods and services, they are a fixed percentage of the retail price

• excise tax - taxes paid on specific goods and services such as cigarettes or gasoline

Question 20

3 type of taxation systems

Answer 20

Proportional taxation

Progressive taxation

Regressive taxation

Question 21

What is proportional taxation

Answer 21

As income increases, the fraction of income paid remains constant

Question 22

What is progressive taxation

Answer 22

As income increases, the fraction of income paid as taxes increases

Question 23

What is regressive taxation

Answer 23

As income increases, the fraction of income paid as taxes decreases

Question 24

Which tax system increase disubtution of income

Answer 24

Progressive tax system

Question 25

What is marginal tax rate

Answer 25

The tax rate paid on additional income , expressed as a percentage

Question 26

Explain Investment in human capital as a policy to reduce income inequalities

Answer 26

Higher access to education and healthcare - giving people more opportunities and increasing their health

Question 27

transfer payments as a policy to reduce income inequality

Answer 27

Transfer payments are payments made by the government to individuals for the purpose of redistributing income away from certain groups

Question 28

Minimum wage as a policy to reduce income inequality

Answer 28

Setting a legal minimum wage therefore raising wages of low income workers

Question 29

Price control as a policy to reduce income inequality

Answer 29

Price ceilings set max price on goods, making it more adorable for low income groups

Price floors set legal minimum prices for certain goods , raising prices above equilibrium, and supporting farmers income