4.2 - Inequality Flashcards
Poverty and inequality
Wealth
The total value of assets owned by an individual or household, including real estate, investments, savings, and possessions.
Wealth inequality
> measures the unequal distribution of the amount of assets owned by individuals or households.
What does wealth inequality reflect?
reflects disparities in accumulated financial resources and net worth
Income
The flow of money received by individuals or households over a specific period, usually annually
Income inequality
Refers to the unequal distribution flow of income to households i.e rent, wages, interest and profit
What are the two main measurements of income inequality
1) Lorenz curve
2) Gini coefficient
Briefly explain the Lorenz curve
- The Lorenz curve is a graphical representation of income distribution in a population.
- It plots the cumulative percentage of income against cumulative share of people from lowest to highest incomes/households (received by the lowest to the highest earners)
- A perfectly equal distribution forms a 45-degree line (line of equality).
The greater the deviation of the Lorenz curve from the line of equality, the higher the income inequality.
Briefly explain the Gini coefficient
- The Gini coefficient is a numerical index that quantifies income inequality.
- It ranges from 0 (perfect equality) to 1 (perfect inequality).
- A higher Gini coefficient indicates greater income inequality.
- It is calculated using the area between the Lorenz curve and the line of equality.
What are causes of income inequality within countries?
- Education:
Disparities in access to quality education can lead to differences in skills and income. - Labour Market:
Wage differentials based on skills, experience, and demand for certain jobs contribute to income inequality. - Wealth Accumulation: Those with access to investment opportunities and assets accumulate more wealth over time.
- Government Policies: Tax structure, social safety nets, and welfare policies can either mitigate or exacerbate inequality.
> Tax structure
Progressive tax systems allow all income earners to contribute to public revenue according to their ability.
Decreasing taxes on the lower end and increasing it on the upper end would mean that the system is more progressive and there would be a more equal distribution of income
What are causes of income inequality between countries?
- Globalisation:
Uneven benefits of globalisation, such as outsourcing and offshoring, can widen income disparities between countries.
> Eg: trade unions
Countries with strong trade union membership tend to have higher levels of income.
With low trade union membership, the exploitation of workers through low wages is easier - Historical Factors: Colonialism, trade imbalances, and unequal access to resources have left lasting impacts on global wealth distribution.
Geopolitical Factors: Conflicts, wars, and political instability can hinder development and exacerbate inequality among nations. - Wage rates
Impacts of economic change and inequality on growth
1) Economic Change:
- Economic growth can either reduce or exacerbate inequality depending on how it is distributed.
- Inclusive growth policies that target marginalised groups can reduce income inequality.
2) Development:
- Developing countries often experience a Gini coefficient reduction as they progress, but this is not guaranteed.
- The focus should be on equitable development, including access to education, healthcare, and infrastructure.
Effects of capitalism
Positive:
- Capitalism can incentivise innovation, entrepreneurship, and wealth creation, which can benefit society as a whole.
Negative:
- Unregulated capitalism can lead to income and wealth concentration among the elite, increasing inequality.
Capitalism
An economic system based on the private ownership of the means of production and their operation for profit
Why is inequality inevitable under capitalism?
- Workers with higher skills receive higher wages
- Workers with little to no skills receive little to no wage
- Individuals with higher income will acquire more assets leading to higher levels of income
- In turn, they can keep on acquiring assets
- Individuals with lower income will find it hard to acquire assets
It has been argued that capitalism needs checks and balances to limit the income and wealth inequality that will naturally develop. What does this call for?
- Government interventions
> play a critical role in shaping how capitalism impacts inequality.
Long term cost of capitalism
The long-term cost of capitalism is that the factors of production become concentrated in ownership with relatively few individuals developing extreme wealth, at the expense of many who lose out
Why is the principle of capitalism considered important?
The principles of capitalism are considered important as the incentive to acquire income raises productivity and output
Lorenz curve definition
Measure of inequality in a country. Plots cumulative households against cumulative income. The further away the curve bends from the line of perfect equality (45 degree line) the more unequal society.
Gini coefficient or index definition
A numerical measure of inequality based on the Lorenz curve. Measured from 0 to 1 (coefficient) or 0 to 100 (index). A higher number equals greater inequality
Gini coefficient formula
G = A/A+B
A= Area between Lorenz curve and the line of perfect equality
B = Area under Lorenz curve
G = Value between 0 and 1, where 0 indicates perfect equality and 1 indicates maximum inequality
Difference between income and wealth
income is flow whereas wealth is stock
