3.4 Economies of Inequality and Poverty

Question 1

What is the definition of “economic inequality”?

Answer 1

The uneven distribution of wealth

Question 2

What is considered “absolute poverty”?

Answer 2

Incomes below a threshold required to access the most basic, life-sustaining goods and services.
(less than $2 a day)

Question 3

What is considered “relative poverty”?

Answer 3

Only happens in countries that do not suffer from absolute poverty. It is a level of income below which their citizens would be struggling.

Incomes are below a given average in society

Question 4

What is the difference between equity and equality?

Answer 4

The word equal is not the same as the word equitable. Equal implies ‘the same’, whereas equitable implies fairness or evenness.

Question 5

In the lorenz curve, what is on the x axis and what on the y axis?

Answer 5

x axis - cumulative population
y axis - cumulative income

Question 6

What is the line of equality?

Answer 6

A line with a gradient of +1, showing perfect distribution between cumulative population and cumulative income

Question 7

What is the “GINI” coefficient?

Answer 7

“Gini coefficient is the ratio of the area between the line of equality and a country’s Lorenz curve and the total area under the line of equality”

Question 8

How do you calculate the “GINI” coefficient?

Answer 8

Gini = a / a+b

Question 9

What can a country do to lower the GINI coefficient?

Answer 9

Tax the rich –> Transfer to the poor

Question 10

Why are countries not exactly ON the line of equality?

Answer 10

That would be a gini coefficient of 0,
and therefore communism

Question 11

What are the 3 types of income taxes?

Answer 11

1. Progressive tax
2. Proportional tax
3. Regressive tax

Question 12

What is “progressive” tax?

Answer 12

“A progressive tax is based on the taxpayer’s ability to pay. It imposes a lower tax rate on low-income earners than on those with a higher income.”

Question 13

What is “proportional” tax?

Answer 13

“A proportional tax is an income tax system that levies the same percentage tax to everyone regardless of income.”

Question 14

What is “regressive” tax?

Answer 14

“A regressive tax is one where the percentage paid in tax rises the less a person earns.”

EG. VAT
VAT will take up a larger proportion of a lower-income wage, than of a higher-income individual

Question 15

What is “wealth” tax?

Answer 15

Extra income on the wealthiest citizens, eg. US wealth tax 2% > 50m$

Question 16

What might “high-tax” rates lead to?

Answer 16

1. Tax evasion
2. Early retirement option
3. Disincentive to work

Question 17

What are some forms of transferring money?

Answer 17

1. Unemployment benefits
2. Social security (child care.. pensions)
3. Direct provision:
   - Infrastructure
   - Schools
   - Hospitals
   - other…

Question 18

What does the “laffer” curve show?

Answer 18

The relationship between tax rates and the amount of tax revenue collected by governments

Question 19

What argument can be shown by the “laffer” curve?

Answer 19

The argument that sometimes cutting tax rates can result in increased total tax revenue.

Question 20

What is the “average tax rate”?

Answer 20

An average tax rate is defined as tax paid divided by total income, expressed as a percentage. [(total tax/total income) x100]

Question 21

What is the “marginal tax rate”?

Answer 21

A marginal tax rate is defined as the tax rate paid on additional income. In the real world, income taxes in a progressive tax system are calculated using successive layers of income, and applying a different tax rate to each layer. The layers of income are called tax brackets, and the corresponding tax rates are called ‘marginal tax rates’.