4.2 Flashcards
What is income? Give examples
It is a flow of money going to factors of production.
E.g. -Wages and salaries paid to workers
-money paid to people receiving benefits such as state pensions
- profits flowing to businesses
- dividends distributed to shareholders.
- rental income to people who own and lease property
- interest paid to owners of capital who hold money in deposit accounts
What is wealth? Give examples.
Wealth is a stock concept.
- savings in a commercial bank
- ownership of shares
- ownership of property
- wealth held in corporate bonds and gov. bonds
- wealth tied up in private pension schemes
Explain what income inequality is. Give figures.
Refers to how unevenly income is distributed throughout a population.
-The less equal the distribution, the greater the income inequality; salaries/wages
- wealth inequality is the uneven distribution of wealth; about net worth
Poorest 50% of global pop share just 8% of total income
richest 10% of global pop earn over 50% of total income
What are the causes of income inequality?
-Advances in technology; structural unemployment for blue collar workers, created niche job sector requiring technical expertise and specific skill sets where wages are higher
- Discrimination; e.g. women are paid less for same job or because of ethnic background
- Economic conditions; downturn/ recession leading to UE, slows business investment
- taxation; extent of progressive vs regressive taxation
- age; younger workers don’t have same experience and human capital so less productive and receive lower incomes`
- education
- globalisation
- corrupt governance; don’t redistribute tax rev.
What is the lorenz curve?
Gives a visual interpretation of income or wealth inequality. The diagonal line shows a situation of perfect equality of income i.e. 50% of population has 50% of income.
What is the Gini coefficient?
= area A/ area A+ area B
- condenses the entire income distribution of a country into a single number between 0 and 1; the higher the number, the greater the degree of income inequality.
- 0; everyone has the same income, 1; a single individual receives all the income.
- A Gini coefficient above 0.4 is frequently associated with political instability and growing social tensions.
What is the significance of capitalism for inequality ?
- private property; people can own tangible assets e.g. land and financial assets e.g. shares
- self interest; people widely assumed to act in their own rational self-interest
- competition in markets; assisted by the entry/exit of firms from industries
- the price mechanism; where prices in markets act as rationing, signalling and allocation devices.
What is absolute (extreme) poverty?
o When a household does not have sufficient income to sustain even a basic acceptable standard of living /to meet people’s basic needs
o Absolute poverty thresholds will vary between developed and developing countries
o World Bank has two extreme poverty lines:
§ (1) Percentage of population living below $1.90 a day (PPP)
§ (2) Percentage of population living below $3.10 a day (PPP)
o Extreme poverty is multi-dimensional - about more than very low income per capita
What is relative poverty?
o A level of household income considerably lower than the median level of income within a country
o The official UK relative poverty line is household disposable income of less than 60% of median income
What are the causes of absolute poverty?
- Population growing faster than GDP in low income countries leading to lower per capita incomes
- Severe savings gap – with many families unable to save and living on less than $1.90 per day
- Absence of basic government / public services such as education and health care
- Effects of endemic corruption in government and business
- High levels of debt and having to pay high interest rates on loans
- Damaging effects of civil wars and natural disasters leading to huge displacements of population
- Low rates of formal employment, many vulnerable/insecure jobs and poverty wages
- Absence of basic property rights which for example constrains ability to own land, claim welfare
What are the main causes of relative poverty?
- Cuts in top rate income taxes in many countries increasing disposable incomes of richer households
- Surging executive pay and high rewards for skilled workers compared to other employees
- Regressive effects of higher food and energy prices on poorer households
- Deep market failures in access to good quality education, health & housing
- Declining strength of trade unions in many countries and rising monopsony power of some big employers
What is the difference between income and wealth?
Income is a ‘flow’ concept and consists of the returns that households receive as a result of providing their factors of
production e.g. wages, rent, interest payments etc. Wealth is a ‘stock’ concept and is a measure of household assets.
What are the main causes of inequality within countries?
- Big differences in wages and earnings in different jobs/occupations
- Wage differentials are themselves caused by demand and supply-side factors in the labour market:
a. Minimum educational qualifications required (a barrier to entry to certain jobs)
b. Varying scale of trade union representation and collective bargaining power with employers
c. Changing skill requirements of different jobs e.g. prompted by technological advances - The effects of unemployment especially among the long-term unemployed and younger workers
- Damaging effects of poor health and nutrition on employment opportunities and productivity
- Changes in the taxation of income and wealth including the extent to which a tax system is progressive on higher incomes and the wealth of the richest in a society.
What are the main causes of inequality between countries?
The gap in per capita incomes between countries has been closing over the last two decades, in part the result of globalisation and the success that many developing / emerging nations have had in raising their economic growth
rates well above population growth so that per capita incomes improve. But there remain deep-rooted inequalities in income between countries. Some of the causes are as follows:
1. Low life expectancy and fewer years of healthy life expectancy
2. Low school enrolment rates as families cannot afford education - this widens the gender opportunity gap
3. Low access to basic health care and poor nutrition which impairs brain development among the young
4. Vulnerability to loan sharks for families mired in debt – having to pay very high interest rates
5. Limited access to affordable technologies – creating a digital divide
6. Much lower productivity which then leads to lower wages
7. Low real spending power limits the size of domestic markets for goods and services
8. Low prices for primary commodities – smallholder farmers have no bargaining power with transnational corporations
What are the main pillars of a free market capitalist economic system?
- Private property – people can own tangible assets such as land and financial assets such as shares
- Self-interest – people widely assumed to act in their own rational self-interest
- Competition in markets – assisted by the entry / exit of firms from industries
- The price mechanism – where prices in markets act as rationing, signalling and allocation devices
- Freedom of choice – from what to buy, which job to have, where to live
- Limited role for government – e.g. to protect private property rights, maintain currency stability
To what extent is a high income and consumption inequality an inevitable consequence of operating in a capitalist system.
- The profit motive: Commercial businesses are assumed to be driven by the profit motive when making investment, output and employment decisions. Profits flow as dividends to shareholders and inequalities of wealth can be widened as businesses list their shares on stock markets and investors can earn capital gains as
well as dividend income.
a. However – even within a capitalist system, there are many people motivated to run their businesses
as social enterprises, where profits made are reinvested for social / environmental purposes
b. Co-operative businesses are owned by their members with profits shared out – the co-operative
model has become more popular in recent years especially after the global financial crisis
c. The government can tax high profits and incomes through a progressive tax system so that the final distribution of income in less unequal than original income
d. Competition policy and intervention by industry regulators can help to control monopoly profits and keep real prices down for consumers - A capitalist labour market: In competitive labour markets, wages and earnings are influenced by the forces of labour demand and supply. In theory there are few limits to the pay that can be achieved by the top earners including those with very scarce skills that the market values and executives who have the power to set their own remuneration (including bonuses and share options). At the lower end of the pay scale, the majority of people earning low wages are not represented by a trade union and have little or no bargaining power with an employer.
a. However – there are many possible interventions in labour markets that can alter the final distribution of income and help to control inequality:
i. Minimum wage legislation setting pay floors that cannot be undercut
ii. Legal caps on executive pay
iii. Legal protections for employees especially in flexible jobs associated with the Gig Economy
b. Government investment in human capital promoting skills and employability of vulnerable groups in society can increase earnings potential
What are the 3 factors that make up the HDI of a country?
- Knowledge: First an educational component made up of two statistics – mean years of schooling (of those already in the workplace) and expected years of schooling (of those still in school)
- Long and healthy life: Second a life expectancy component is calculated using a minimum value for life expectancy of 25 years and maximum value of 85 years
- A decent standard of living: The final element is gross national income (GNI) per capita adjusted to purchasing
power parity standard (PPP)
* GNI (Gross National Income is used because of the growing size of remittances across countries)
* Log of income is used in the HDI calculation because income is instrumental to human development, but higher incomes are assumed to have a declining extra contribution to human development
What are the advantages of using the HDI?
- Relatively easy data to collect and compare
- As objective as possible – it could be difficult, for example, to come up with an accurate/reliable measure of more qualitative factors such as freedom of speech
- Measures such as longevity and education levels are indicative of other development factors
o People tend to live longer if there is better access to doctors and healthcare, access to good
sanitation and housing etc
What are the disadvantages of using the HDI?
- The standard HDI measure does not take account qualitative factors, such as cultural identity and political freedoms (human security, gender opportunities and human rights)
- The GNI per capita figure – and consequently the HDI figure – takes no account of income distribution.
- If income is unevenly distributed, GNI per capita will be an inaccurate measure of people’s well-being
- Purchasing power parity (PPP) values used to adjust GNI data change quickly and can be inaccurate
- Higher GNI may result in more spending on aspects that could reduce living standards e.g. polluting power stations rather than green energy production, or armaments
What are 10 of the sustainable development goals?
- Goal 1 End poverty in all its forms everywhere
- Goal 2 End hunger, achieve food security and improved nutrition, promote sustainable agriculture
- Goal 3 Ensure healthy lives and promote well-being for all at all ages
- Goal 4 Ensure inclusive and equitable quality education and promote life-long learning opportunities for all
- Goal 5 Achieve gender equality and empower all women and girls
- Goal 6 Ensure availability and sustainable management of water and sanitation for all
- Goal 7 Ensure access to affordable, reliable, sustainable, and modern energy for all
- Goal 8 Promote sustained, inclusive and sustainable growth, full and productive employment and decent work for all
- Goal 9 Build resilient infrastructure, promote inclusive & sustainable industrialization and foster innovation
- Goal 10 Reduce inequality within and among countries
