3.7.1 - The Distribution of Income and Wealth

Question 1

What does unregulated market conditions tend to lead to?

Answer 1

Highly unequal distrubutions of income and wealth.

Question 2

What is the distribution of income?

Answer 2

How income is divided between rich and poor, or between groups of society.

Question 3

What is the distribution of wealth?

Answer 3

How welath is divided between rich and poor, or between different societal groups.

Question 4

What is income?

Answer 4

The personal / household flow of money a person receives in a particular time period.

Question 5

What is wealth?

Answer 5

The stock of everything that a person owns at a particular point in time.

Question 6

What is the main difference between income and wealth?

Answer 6

Income is a flow, whereas wealth is a stock.

Question 7

How can income affect wealth?

Answer 7

If you save some of your income, by converting it to a house, car or just saving in a bank account, it turns into wealth as it then becomes a stock.

Question 8

Why do those with higher incomes tend to be more wealthy?

Answer 8

Those on higher incomes have more disposable money to convert to wealth via investment or saving.

Question 9

Why do those on lower incomes tend to be less wealthy?

Answer 9

The poor enter into a vicious cycle in which the poor have to borrow adding to their personal debt.

Question 10

How does the World Bank classify countries according to their income per capita?

Answer 10

4 groups:
Low income
Lower-middle income
Upper-middle income
High-income

Low = <$1,005
Lower-middle = $1,006 - $3,955
Upper-income = $3,956 - $12,335
High-income = >$12,235

Question 11

How does the World Bank classify countries according to their income per capita?

Answer 11

4 groups:
Low income
Lower-middle income
Upper-middle income
High-income

Low = <$1,005
Lower-middle = $1,006 - $3,955
Upper-income = $3,956 - $12,335
High-income = >$12,235

Question 12

What are the main factors that affect wealth?

Answer 12

Factors of production
The distinction between earned and unearned income
Wage and salary differentials
Globalisation and the international migration of workers

Question 13

What did the top fifth of UK households receieve in terms of national income?

Answer 13

40% of total household income.

Question 13

What did the top fifth of UK households receive in terms of national income?

Answer 13

40% of total household income.

Question 14

What did the bottom fifth of UK households receive in terms of national income?

Answer 14

8% of total household income.

Question 15

Why do large landowners have such high incomes?

Answer 15

As they own land, they rent the land to those who want access to it.

Question 15

Why do large landowners have such high incomes?

Answer 15

As they own land, they rent the land to those who want access to it.

Question 16

How has the share of national income of landlords and owners of capital changed?

Answer 16

It has increased.

Question 17

Why has labour’s share of worldwide incomes fallen in recent years?

Answer 17

Wages have not been rising as quickly as productivity has increased hence labour’s share of national income has fallen.
Profits and entrepreneurial incomes have risen at the expense of wages and salaries.

Question 18

How has the distinction between earned and unearned income influenced the distribution of income?

Answer 18

Those on the top end of incomes tend to have more of their income due to unearned income meaning they are able to make more money in an earned sense.

Question 19

What is earned income?

Answer 19

Income gained from wages, salaries, other forms of employee compensation and self-employment income.

Question 20

What is unearned income?

Answer 20

Incomes derived from sources other than employment such as interest and investments.

Question 21

How do wage and salary differentials affect the distribution of income?

Answer 21

The wage rates between top and bottom have widened.
The differences in hourly wage rates are the differences in labour productivity and different levels of labour supply.

Jobs with high wages are likely due to inelastic demand for those workers, alongside inelastic wage rates due to long training periods. The long training periods also restrict supply of those workers.

Question 22

How does globalisation and the international migration of workers affect income distribution?

Answer 22

Increased globalisation means that low MRP UK workers are up against low MRP workers in areas such as India, with much lower hourly wages. Many jobs have been outsourced to countries like India as firms pay less for the same level of productivity.

This level of international competition has led to falling wages in UK labour markets to compete with low wages in other countries.

Question 23

When did labour income shares begin to trend downwards?

Answer 23

1980s.

Question 24

What can labour income shares be tied to in advanced economies?

Answer 24

The rise of technology leading to rapid progress in information and telecommunication alongside a high share of occupations that could be easily automated.

Question 25

What is more inequal in terms of distribution, income or wealth?

Answer 25

Wealth.

Question 26

What percentage of adults own half the world’s wealth?

Answer 26

The top 1%.

Question 27

What is the definiton of total net wealth?

Answer 27

The sum of four components:
Net property wealth
Physical wealth
Net financial wealth
Private pension wealth

Question 28

What is not included in the definition of total net wealth?

Answer 28

The right to state pensions.

Question 28

What is not included in the definition of total net wealth?

Answer 28

The right to state pensions.

Question 29

What factors affect the distribution of wealth?

Answer 29

The ability to benefit from capital gains
Private pension assets
Inheritance/gifts/luck
Wealth taxation versus income taxation

Question 30

How does the ability to benefit from capital gains affect the distribution of wealth?

Answer 30

The more a person has in goods that appreciate in wealth, the more that person will get in capital gains.

People who are wealthy tend to own more expensive houses that appreciate in value, those who are poorer tend to rent accomodation and therefore do not benefit from capital gains.

Question 31

How does access to private pension assets affect the distribution of wealth?

Answer 31

Private pensions are the largest stocks of wealth in the UK, accounting for ~40% of wealth.

Recently, company pension schemes became available for many low-paid UK workers so many more workers gained access to pension funds outside of the provided state pension.

Question 31

How does access to private pension assets affect the distribution of wealth?

Answer 31

Private pensions are the largest stocks of wealth in the UK, accounting for ~40% of wealth.

Recently, company pension schemes became available for many low-paid UK workers so many more workers gained access to pension funds outside of the provided state pension.

Question 32

How did inheritance, gifts and luck affect the distribution of wealth?

Answer 32

In terms of inheritance, there is ‘old money’ and ‘new money’.
‘Old money’ includes those people that get their money from inheritance. Those who have old money tend to have most of their wealth in land so they benefit from capital gains.

Question 33

How does wealth taxation vs. income taxation affect the distribution of wealth?

Answer 33

The UK gains much more tax revenue from income taxation rather than wealth taxation.

Wealth is lightly taxed in the UK, and there are many loopholes in taxation law.

Question 34

What is equality?

Answer 34

When everyone is treated exactly the same.

Question 35

What is equity?

Answer 35

Everyone is treated fairly.

Question 36

Why is equity a normative concept?

Answer 36

It is not quantifiable and therefore cannot be measured.

Question 37

Why is equality a positive concept?

Answer 37

It is quantifiable and therefore can be measured and proved.

Question 38

What is horizontal equity?

Answer 38

When households with the same income and situation pay the same income tax as similar households.

Question 39

What is vertical equity?

Answer 39

Take income from the rich as they do not need it, and redistribute it to the poor.

Question 40

What is the benefit principle?

Answer 40

Those who receive the most benefit from government spending should spend the most in taxes.

Question 41

Why does the benefit principle conflict with vertical equity?

Answer 41

The benefit principle states that those on low incomes should pay more tax as they benefit from the welfare state and other governmental spending.
Vertical equity says that the richest should be taxed more as they do not need it and then give that money to the poor.

Question 42

What is the Lorenz Curve?

Answer 42

A graph on which cumulative percentages of total national income is plotted against the cumulative percentage of population.

The extent to which the curve dips below the diagonal line indicates the level of income inequality.

Question 43

Draw the Lorenz Curve.

Answer 43

Question 44

What is the gini coefficient?

Answer 44

Measure of the extent to which the distribution of income or wealth among individuals or households within an economy deviates from perfectly equal distribution.

Question 45

If incomes were distributed equally, where would the Lorenz curve lie?

Answer 45

On the diagonal line of perfect equality.

Question 46

What is the range for Gini Coefficients?

Answer 46

0 to 1.

0 being complete income equality, 1 being complete income inequality.

Question 47

If the Gini coefficient of a country was 1, where would the Lorenz curve lie?

Answer 47

The Lorenz curve would move horizontally across the x axis, then vertically upwards to 1.

Question 48

What are the likely benefits of equal distributions of income and wealth?

Answer 48

More equal distributions of income and wealth (IW) lead to faster economic growth. The benefits of the faster growth can then be used to improve living conditions of the population.
The logic in this argument lies in the fact that those who possess little wealth do not spend much, if you increase spending on consumer goods, aggregate demand increases and economic growth is stimulated. The better-off spend less of their income on consumer goods slowing economic growth.

Question 49

What are the likely negatives of income and wealth redistribution?

Answer 49

Free-market economists argue that progressive taxation reduces incentives to work hard to escape poverty. Some extreme free-marketiers argue that increasing inequality is necessary to cause those on welfare to leave benefits to search for jobs causing increased economic growth.

Question 50

How can age cause differentials in income and wealth?

Answer 50

Increased skill of workers is likely to translate to higher incomes as they have a higher MRP.

Once you retire, if you are living on the state pension, you are unlikely to make the same as a working person.

If you invested your incomes when you were working, you can have stock assets that you can rent or sell, or in terms of pensions, have a flow concept of money after retirement.