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
For example, it could be 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 are the factors that influence the distribution of income?

Answer 4

• Labour supply for a job decided by level of employment; education/training, nature of job, geography, population, skills, FoP availability, country development level
• Labour demand for a job 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, 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

Question 16

What is absolute poverty?

Answer 16

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

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 are considered being in relative poverty

Question 18

What are the causes of poverty?

Answer 18

• Inequality in wages/ unemployment: if workers can earn a higher level of education, they will be able to access jobs with higher wages
• Welfare payments: tend to increase less than wages, meaning 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 FoP/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

Taxes, such as inheritance tax, can redistribute wealth from the rich to the benefit of the poor:
- Welfare payments (but could reduce incentives to work)
- Subsidies to decrease the cost of living
- Fund education and heath systems to improve quality of human capital and increase productivity
- Build infrastructure, such as roads, to increase the mobility of FoP
- Increase minimum wage to incentivise work and decrease absolute poverty
These can all lead to SR and LR growth

Question 21

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

Answer 21

• Decreased infrastructure may incentivise work
• Trickle down effect, meaning that eventually wealth from the rich will benefit the poor, leading to the multiplier and acceleration processes
  But there is a lack of will to fix the problem