4.1.7 - The Distribution Of Income And Wealth: Poverty And Inequality

Question 1

Define Income

Answer 1

Represents a flow of earnings from using factors of production to generate an output of goods. E.g. wages are a reward for labour.

Question 2

Define wealth

Answer 2

Is the current value of a stock of assets owned by someone or society as a whole. E.g. savings in bank accounts or ownership of property

Question 3

Explain and draw the Lorenz curve as a measure of inequality

What would perfect equality look like

Answer 3

Is a way of showing the distribution of income within an economy. It shows the cumulative share of income from different sections of the population.

The greater the area of A the higher the inequality

If there was perfect equality the poorest 20% of the population would gain 20% of the total income.

Question 4

Explain the gini coefficient as a measure of inequality

Answer 4

Is a measure of income inequality that condenses the entire income distribution for a country into a single number between 0 and 1. The lower the number the higher the level of equality

Question 5

Explain the factors leading to an unequal distribution of income (3)

Answer 5

Differences in skills, qualifications and work experience- is a high demand for workers with these attributes, will earn more than those lacking

Differences in wealth- wealthier individuals earn more income from their holding of assets in the form of dividends and assets.

Impact of the state- a free market system would provide fewer welfare benefits than a command economy.

Question 6

Explain the factors leading to the unequal distribution of wealth (4)

Answer 6

Differences in income - higher earners are more able to save money and earn interests.

Inheritance- property and other valuable assets can be passed down from one generation to the next

Marriage - wealthy people tend to marry other wealthy people, leading to a concentration of wealth.

Property - wealth can generate wealth for those who own valuable assets such as property.

Question 7

What are the costs of income and wealth inequality (2)

Answer 7

Social tensions- poorer members of society come to resent richer members of society, leads to friction and crime.

Creation of an underclass- may see a segment of society become reliant on welfare benefits, with low social mobility and living standards

Question 8

What are the benefits of income and wealth inequality (2)

Answer 8

Incentive effects- Incentivises people to earn higher salaries through hard work, innovation and entrepreneurship. Can help generate economic growth

Trickle down- economic benefits of having high earners can trickle down to all members of society, creating employment opportunities, the tax generated can be used to improve living standards of the poor and improve healthcare and education.

Question 9

Define equality

Define equity

Answer 9

Is providing the same level of opportunity and assistance to all segments of society , such as ethnicity and gender.

Is providing various levels of support and assistance depending on specific needs and abilities

Question 10

Explain the arguments for the redistribution of income and wealth to improve equality (4)

Answer 10

Low income groups will earn more so have more disposable income to demand goods and services

More equal societies lead to healthier societies - lower crime rates, improved health, reduced imprisonments

Reduced reliance on government - less unemployment benefits can be used to invest in infrastructure

Reduced wage differentials- less social tensions between income groups

Question 11

Explain the arguments against the redistribution of income and wealth to improve equality (2)

Answer 11

Reduced incentives - less incentive to work harder and get a better education

Discriminated members of society may feel they are only getting a job because they are discriminated against rather than their skills and qualifications.

Question 12

Define Absolute poverty

Answer 12

Is a condition where some can’t afford the basic necessities to sustain life (food, shelter, safe drinking water and sanitation)

Question 13

Define relative poverty

Answer 13

Is a condition where some people in society earn an income 60% less than the average income of a country.

Question 14

Define primary poverty

Define secondary poverty

Answer 14

Is a situation where income is insufficient to meet basic needs

Is a situation where money is misspent on luxuries, leaving insufficient income to buy necessities

Question 15

Explain the causes of poverty (7)

Answer 15

Relative low wage- low skilled workers have low paid jobs

Unemployment- individuals relying on unemployment benefits earn less than those in work

Regressive taxation - places a burden on the poorest members of society

Age- older members of society rely on pensions, which have not grown in line with incomes

Imperfect information- people are unaware of their eligibility to claim welfare benefits

Health- health problems can effect peoples ability to work and earn

Poverty cycle- those born into poor families have a high change of being poor themselves

Question 16

Explain the consequences of poverty (3)

Answer 16

Greater demands on the welfare system- people in poverty are more likely to claim welfare benefits at a cost to the government

Poor educational attainment- people from poorer backgrounds tend to perform worse in education, have a lower MRP

Poor health- those in poverty tend to have worse physical and mental health

Question 17

Define and explain progressive taxes as a government policy to alleviate poverty and influence the distribution of income and wealth

Give examples

Answer 17

Takes a higher percentage of tax from people with higher incomes. The more a person earns, the higher their average rate of tax will be.

Examples include:
Income tax which charges different people different tax rates based on their incomes
VAT, people with higher incomes spend more so pay higher VAT.

Question 18

Define and explain National Minimum Wage as a government policy to alleviate poverty and influence the distribution of income and wealth

Answer 18

Is a legal minimum wage designed to prevent employers from exploiting those in low skilled jobs with low wages

Question 19

Define and explain transfer payments as a government policy to alleviate poverty and influence the distribution of income and wealth

Give examples

Answer 19

Are one way payments to a person or organisation which has exchanged no goods in return. Usually occurs for social programs such as welfare and student grants paid by the government.

Examples:
Social security benefits for those who have a disability which prevents them from working
Unemployment benefits

Question 20

Define and explain Education and training improvements as a government policy to alleviate poverty and influence the distribution of income and wealth

Answer 20

Help to increase the MRP of labour, reducing occupational immobility and enhancing employment.

Question 21

Define and explain promoting trickle down as a government policy to alleviate poverty and influence the distribution of income and wealth

Answer 21

Sees policies to promote economic growth, to raise average incomes and to improve standard of living for the poorest members of society

Question 22

Explain the economic consequences of policies to alleviate poverty (5)

Answer 22

Progressive taxes- creates disincentives to work, reducing income tax revenues.
NMW- If it is too high it could lead to increased unemployment.
Transfer payments- gap between people on benefits and in low income jobs is not enough to incentivise people to work.
Education and training- an individual may take a while to feel the benefits of education and training in terms of employability
Promoting trickle down- in reality it does not work, highest earners find loopholes to avoid paying tax.

Question 23

Define Horizontal equity

Answer 23

Is an economic theory that states that individuals with similar income and assets should pay the same amount in taxes. The more neutral a tax system is the more horizontally equitable it is.

Question 24

Define Vertical equity

Answer 24

Is the different treatment of individuals or groups which are dissimilar in characteristics.