4.1.7 The distribution of income and wealth: poverty and inequality

Question 1

What is income?

Answer 1

The inflow of money from factors of production or assets, such as from a job, welfare payments, interest or dividends.

Question 2

What is wealth?

Answer 2

A stock of financial assets, such as a house, shares, land, cars and savings.

Question 3

What is the difference between income and wealth?

Answer 3

Income is a flow of money from assets, whereas wealth is a stock of financial assets

Question 4

What factors influence the distribution of income?

Answer 4

• Supply of labour decided by level of employment; education/training, nature of job, geography, population, skills, FoP availability, country development level
• Demand for labour decided by; level of demand for product (derived demand), minimum wage
• Welfare payments and taxes
• Trade unions, as they can set minimum wages

Question 5

What are the factors that influence the distribution of wealth?

Answer 5

• Inheritance
• FoP ownership, such as capital
• Surplus of income to spending
• Government policy, such as inheritance tax
• Access to financial services, such as credit and interest rates
• Privilege/contacts

Question 6

What is equity?

Answer 6

Fairness, or what is considered to be an acceptable distribution of income and wealth in society (could be subjective)

Question 7

What is equality?

Answer 7

The equal distribution of wealth and income in society, so that everyone has the same income

Question 8

What is the difference between equality and equity in relation to the distribution of income and wealth?

Answer 8

• Equality refers to the equal distribution of wealth and income in society, so that everyone has the same income
• Equity refers to fairness, or what is considered to be an acceptable distribution of income and wealth in society, so can be subjective

Question 9

How is income/wealth inequality measured?

Answer 9

The Lorenz curve and the Gini coefficient (A/A+B)

Question 10

What are the positive consequences of inequality (free market view)?

Answer 10

• It gives incentive to worker harder, providing motivation, increasing productivity and efficiency
• Profit motive can decrease costs, which is an improved answer to the economic problem

Question 11

What are the negative consequences of inequality?

Answer 11

• Reduced quality of life for the poor
• Decreased government budget caused from more crime, more government spending on benefits, and a potential decrease in tax revenue
• Poor cannot afford to invest in themselves (health/education), decreasing human capital, decreasing long run growth
• Creative destruction, increasing structural unemployment, so people need to learn new skills

Question 12

Why might wealth inequality be seen as being worse than income inequality?

Answer 12

• Wealth is perpetuated and passed on between generations
• Wealth is harder to increase/change/equalise
• Wealth inequality is more extensive than income inequality
• Wealth can be hidden more easily than income
• Income is easier to target and tax

Question 13

Why might income inequality be seen as being worse than wealth inequality?

Answer 13

• Income inequality leads to wealth inequality
• Income inequality leads to a worsening government budget due to increased benefits

Question 14

What is the trickle down effect?

Answer 14

• If we allow the rich to get richer, spending increases, increasing income for others, so everybody is better off
• However, this can be seen as an excuse for free market economics and to minimise intervention
• Following the implementation of this idea has worsened inequality, as the wealthy may not spend in the local economy

Question 15

What diagram can represent the trickle down effect?

Answer 15

The Kuznets curve

Question 16

What is absolute poverty?

Answer 16

• Living below subsistence, meaning that the person is unable to afford necessities
• The number of people living on less than $1.25 per day according to the World Bank

Question 17

What is relative poverty?

Answer 17

• Lower than a given proportion of the median income in the country
• Those below 60% of the median income in the UK

Question 18

What are the causes of poverty?

Answer 18

• Inequality in wages/ unemployment: if workers can earn a higher level of education, they can access jobs with higher wages
• Welfare payments: tend to increase less than wages, so those on benefits see a smaller real increase in income compared to those in jobs
• Taxes: regressive taxes mean that those with lower incomes bear a larger burden of the tax
• Health issues: can make it hard to get a job
• Conflict: destruction of factors of production or infrastructure
• Corruption: government spending, leaders might keep most of the wealth
• Natural disasters: floods and earthquakes can destroy FoP/infrastructure, such as the Nepal earthquake in 2015 pushing people into poverty
• Lack of resource or factors of production

Question 19

What are the effects of poverty?

Answer 19

• Lower life expectancies, poorer standards of health, underdeveloped infants caused by malnutrition, decreasing future productivity
• Decreased standards of living: poor housing, crime, social unrest, mental health issues, poor sanitation
• Unemployment trap: some unemployed may choose not to work as wages may be lower than benefits, leading to hysteresis, causing a loss of labour and human capital
• Impact on government: budget deficit due to increased spending on benefits, decreased tax revenue, creating an opportunity cost of spending on debt servicing
• Pressure on public institutions: such as police/legal systems due to increased crime rate, and NHS/health systems, as people cannot afford to look after themselves

Question 20

What interventionist policies can influence the distribution of income and wealth and alleviate poverty?

Answer 20

• Progressive taxes, such as higher rates of income tax for the richest earners
• Inheritance tax to redistribute wealth from the rich to the benefit of the poor
  Revenue gained can be used for:
• Welfare payments, which could lessen the incentive to work, but increasing the minimum wage could fix this, while decreasing poverty
• Subsidies to decrease the cost of living, such as energy
• Fund education and heath systems to improve quality of human capital and increase productivity

Question 21

What are the problems of interventionist policies aiming to influence the distribution of income and wealth and alleviate poverty?

Answer 21

• Increasing taxation could disincentivise work, or lead to more tax avoidance or evasion, resulting in a net loss of tax revenue
• Revenue gained must be used effectively to result in the intended consequences
• A new minimum wage can create unemployment of Qs - Qd

Question 22

What are the economic consequences of interventionist policies influencing the distribution of income and wealth and alleviating poverty?

Answer 22

• Improving budget deficit with increased tax revenue
• Increased employment and short and long run growth from investment

Question 23

What free market policies can influence the distribution of income and wealth and alleviate poverty?

Answer 23

• Trickle down effect, meaning that eventually wealth from the rich will benefit the poor, leading to the multiplier and acceleration processes, but can be ineffective
• Poor infrastructure may incentivise some to work for improvement

Question 24

What are the problems of free market policies aiming to influence the distribution of income and wealth and alleviate poverty?

Answer 24

There is a lack of will to solve the problem by relying on the trickle down effect, as no effort is made to solve a significant issue.

Question 25

What are the economic consequences of free market policies aiming to influence the distribution of income and wealth and alleviate poverty?

Answer 25

If work is incentivised, growth could occur, but this is unlikely.