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H - Econ - 2 > 3.7.1 - The Distribution of Income and Wealth > Flashcards

3.7.1 - The Distribution of Income and Wealth Flashcards

1
Q

What does unregulated market conditions tend to lead to?

A

Highly unequal distrubutions of income and wealth.

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2
Q

What is the distribution of income?

A

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

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3
Q

What is the distribution of wealth?

A

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

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4
Q

What is income?

A

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

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5
Q

What is wealth?

A

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

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6
Q

What is the main difference between income and wealth?

A

Income is a flow, whereas wealth is a stock.

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7
Q

How can income affect wealth?

A

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.

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8
Q

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

A

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

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9
Q

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

A

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

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10
Q

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

A

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

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11
Q

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

A

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

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12
Q

What are the main factors that affect wealth?

A

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

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13
Q

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

A

40% of total household income.

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14
Q

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

A

8% of total household income.

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15
Q

Why do large landowners have such high incomes?

A

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

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16
Q

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

A

It has increased.

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17
Q

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

A

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.

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18
Q

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

A

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.

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19
Q

What is earned income?

A

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

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20
Q

What is unearned income?

A

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

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21
Q

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

A

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.

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22
Q

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

A

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.

23
Q

When did labour income shares begin to trend downwards?

A

1980s.

24
Q

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

A

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

25
Q

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

A

Wealth.

26
Q

What percentage of adults own half the nations wealth?

A

The top 1%.

27
Q

What is the definiton of total net wealth?

A

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

28
Q

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

A

The right to state pensions.

29
Q

What factors affect the distribution of wealth?

A

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

30
Q

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

A

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.

31
Q

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

A

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.

32
Q

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

A

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.

33
Q

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

A

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.

34
Q

What is equality?

A

When everyone is treated exactly the same.

35
Q

What is equity?

A

Everyone is treated fairly.

36
Q

Why is equity a normative concept?

A

It is not quantifiable and therefore cannot be measured.

37
Q

Why is equality a positive concept?

A

It is quantifiable and therefore can be measured and proved.

38
Q

What is horizontal equity?

A

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

39
Q

What is vertical equity?

A

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

40
Q

What is the benefit principle?

A

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

41
Q

Why does the benefit principle conflict with vertical equity?

A

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.

42
Q

What is the Lorenz Curve?

A

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.

43
Q

Draw the Lorenz Curve.

A
44
Q

What is the gini coefficient?

A

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

45
Q

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

A

On the diagonal line of perfect equality.

46
Q

What is the range for Gini Coefficients?

A

0 to 1.

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

47
Q

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

A

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

48
Q

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

A

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.

49
Q

What are the likely negatives of income and wealth redistribution?

A

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.

50
Q

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

A

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.

51
Q

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

A

The right to state pensions.

52
Q

Why do large landowners have such high incomes?

A

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

53
Q

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

A

40% of total household income.

H - Econ - 2 (57 decks)

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