4.1.7 The distribution of income and wealth: poverty and inequality

Question 1

What is income?

Answer 1

The inflow of money from FoP/assets

Question 2

What is wealth?

Answer 2

A stock consisting of financial assets that you own

Question 3

What is the difference between income and wealth?

Answer 3

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

Question 4

What are the factors that influence the distribution of income?

Answer 4

• Supply and demand
• Labour supply for a job decided by; education/training, nature of job, geography, population, skills, mindset, family/culture, FoP availability, country development level
• Labour demand for a job decided by; level of demand for product (derived demand), discrimination
• Government intervention (tax/subsidy)
• Trade unions - minimum wage
• Decided by FoP ownership

Question 5

What are the factors that influence the distribution of wealth?

Answer 5

• Inheritance
• FoP ownership (capital)
• Surplus of income over spending
• Government policy (inheritance tax)
• Cultural and social structure and norms
• Access to financial services especially 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, whereas equity refers to fairness, or what is considered to be an acceptable distribution of income and wealth in society, which could 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 (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 by: increased crime, increased government spending on benefits, a potential decrease in tax revenue
• Poor cannot afford to invest in themselves (health/education), decreasing human capital, decreasing long run/ trend 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