4.2 Poverty and inequality

Question 1

What is absolute poverty

Answer 1

This measures the number of people living below $2.15, which is necessary to be able to afford basic goods and services.

Question 2

What is relative poverty

Answer 2

when the income of a household is low compared to others

e.g. when a person has income below 60 of the median household income (

Question 3

What is the Lorenz Curve

Answer 3

Agraph that measures the degree of income inequality. The further the Lorenz curve is from the 45 degree line of perfect equality, the more inequality there is in society.

Question 4

What is the Gini Coefficient

Answer 4

This is a measure of inequality based on the Lorenz
curve:

• The Gini coefficient is area a / a+b.
• The bigger area a is, the more inequality exists.
• A Gini coefficient of 0 = perfect equality.
• A Gini coefficient of 1.00 = perfect inequality.

Question 5

How does inequality in the UK changed since the 80s

Answer 5

• UK had fallen through the post-war period of 1945-80 but reversed in the 80s
  By 1994 the top 1% of household’s share of total income is 8%

Question 6

How can absolute poverty be reduced

Answer 6

• Absolute poverty can be reduced by economic growth, which benefits the
  poorest in society.
• Absolute poverty could also be solved by greater redistribution of income
  in society, to provide minimal housing / food & water for the poorest.
• Developed countries have very minimal levels of absolute poverty, due to the welfare state

Question 7

What causes relative poverty/inequality in the UK

Answer 7

1. Inequality in wages and earnings growth- UK deindustrilisation + globalisation
2. SU Unemployment - have to rely on dole
3. Falling relative value of state benefits
4. Regressive Taxes -set to hit 30 year high
5. Decline in TU membership - fallen to 22%
6. growth in underemployment, zero-hour contracts,
   part-time jobs and temporary jobs, all of which mean lower wages for
   workers.
7. Discrimination - ‘Muslim Penalty’
8. Single Income Family- 50% of live births to single mothers
9. Poverty Cycle passes onto next generation

Question 8

What is the poverty trap

Answer 8

when the tax and benefits system creates a disincentive to look for work or work for longer hours. By working longer hours, individuals may find they lose income due to income tax and national insurance contributions as well as losing some income-related state benefits.

but UK replacement rate is 0.22

Question 9

How many times bigger are the wages of the riches compared to the average workers, and how has this statistic changed

Answer 9

The wages of the richest are now
170 times the average worker, compared to 60 times before.

Question 10

What are the consequences of high relative poverty for growth

Answer 10

1) Causes a self-perpetuating poverty cycle
* Limited access to health care and education
* Volatile incones, high debts + low savings

2) Misallocation of scarce resources  * 	Capital investment in society is skewed towards the preferences of the rich * Low collateral - limits growth of entrepreneurship

Question 11

How can government spending reduce poverty

Answer 11

1) Welfare State/Transfer Payments:
* Universal Child Benefits
* Public Pensions
* Conditional + means tested welfare transfers e.g. Job Centre

2) State Provided Services:
* Education; social mobility
* Healthcare
* Social Housing provided by LA
* Training e.g. free A Levels for over 21

Question 12

What is the difference between wealth and income

Answer 12

• Wealth is a stock concept; it is the value of assets, such as savings,
  housing, and shares.
• Income is the amount of money a person receives per time period e.g.
  salary

Question 13

Why is wealth inequality usually greater than income inequality

Answer 13

• Those with low income do not have any disposable income to save to
  increase wealth.
• Those who are wealthy (e.g. own a house) can gain rentable income,
  which they can use to invest in the accumulation of more assets.
• Wealth can be inherited, income cannot.

Question 14

Is inequality necessary?

Answer 14

• Gives incentives to take risks and put the effort into setting up a business. Without the prospect of higher income, enterprise would be limited.
• Policies to reduce inequality may create disincentives to work e.g. higher
  income tax may discourage working overtime.

Benefits to the unemployed / low paid can discourage taking work (unemployment trap / poverty trap).

Question 15

Is inequality necessary?

Answer 15

• Gives incentives to take risks and put the effort into setting up a business. Without the prospect of higher income, enterprise would be limited.
• Policies to reduce inequality may create disincentives to work e.g. higher
  income tax may discourage working overtime.

Benefits to the unemployed / low paid can discourage taking work (unemployment trap / poverty trap).

Question 16

What are the issues associated with inequality

Answer 16

1. Exploitation. e.g. landlords monopoly power in setting rents, especially in places like London.
2. Social friction. High levels of inequality can cause social friction and
   resentment in society- Gini above 0.4
3. Diminishing marginal utility of money- more tax from highincome
   earners has little impact on living standards. Taking tax from low
   earners has a greater impact, because they have to cut back on essentials.

4.Difference between equality of opportunity and equality of outcome-

Question 17

How can economic growth + development exacerbate inequality

Answer 17

• Skilled labour. Growth could lead to increased demand for skilled labour
  and a fall in demand for unskilled labour
• Regional inequality - prosperous regions sucking in labour
• Monopsony power of larger firms
  * Living costs. Economic development can lead to increased costs of living
  (transport / housing), which negates any rise in real wages.

Question 18

How can economic growth + development reduce inequality

Answer 18

• Bigger Welfare State and opportunity to pursue policy - tax revenues rise and it can be used to fund a welfare state
• Real wages. Economic growth tends to put upward pressure on real
  wages, as firms compete to get workers, leading to a ‘trickle down effect’.
• More opportunities - diversification away from
  producing primary products.
• Organised Labour - growth of trade unions to enable rising real wages

Question 19

What are causes of absolute poverty

Answer 19

· Drug/alcohol addiction

· Mental illness

· Homelessness/no fixed address
To Claim benefits –> you need a bank account –> you need an address. Therefore those in homelessness are de facto in absolute poverty

Living in a third world country/a country without established the benefit/welfare system.

Question 20

What are Policies to tackle poverty

Answer 20

1. Free Market Approach
2. Training and Education
3. Increase in Benefits
4. Increase in Progressive Tax

Question 21

What are the advantages of the free market approach to tackle poverty

Answer 21

• Trickle Down. The spending and investment of the rich trickles down to the low income earners, reducing relative poverty.
• Greater** incentive to achieve more in school**+ more tax revenue which can be spent on policies to reduce inequality such as training and education
• No UE trap
• The money spent on schemes such as transfer payments could be better spent on training and education which arguably tackle the root cause of poverty

Question 22

What are the disadvantages of the free market approach to ackling poverty

Answer 22

• Does** little to resolve absolute poverty** as people who don’t have the skills to get a job will still not be able to find employment
• Doesn’t protect those in poverty so there’s no guarantee there will be any redistribution
• With less government intervention, there will be more discrimination
• Relative poverty may increase in a more free market approach

IMF - ‘rising income share of the top 20% results in lower growth’
LSE - ‘tax cuts for the risk have only increase inequality, with no gains’

Question 23

What are the advantages of training and education in tackling poverty

Answer 23

· helps tackle root cause
* the qualifications gained from T+E helps increase employability + prevent structural Un
* More education –> higher bargaining power and earning
* Break out of poverty cycle

Question 24

What are the disadvantages of training and education in tackling poverty

Answer 24

· time lag - doesn’t help those currently in poverty
* Even with a high level of T+E you can face discriminaiton
* Standards of T+E rely on local schools which are typically better in high-Y areas

e.g. Schools in the most affluent areas are more than twice as likely to be rated ‘outstanding’ by Ofsted

• Depends on success of the actual training e.g. 42% dropout rate for apprenticeships

Question 25

What are the advantages of increasing benefits to those on low income to tackle poverty

Answer 25

● Directly targets those in poverty
* benefits eradicate absolute poverty + can reduce relative poverty
* lower Y have higher MPC so transfer benefits cause increased AD
* Increase opportunities for children –> increased LRAS LR

Question 26

What are the disadvantages of increasing benefits to tackle poverty

Answer 26

● Raising benefits may reduce the incentive to find employment–> strengthens the unemployment trap and the cycle of poverty
* doesn’t tackle the root cause of why individuals or families are in poverty.
* Opportunity cost of transfer payments

Question 27

What are the advantages of increasing progressive taxation to tackle poverty

• Increasing top band tax + personal allowance

Answer 27

• allows for lower income earners to keep a greater proportion of their income, + taxes higher income earners to a greater extent so relative poverty decreases.
• Redistribution leads to greater AD and thus more tax revenue
• Opp. cost of not working increases as PA increased

Question 28

What are the limitations of increasing progressive taxation to tackle poverty

• Increasing top band tax + personal allowance

Answer 28

• Raising PA only affects those in work; doesn’t address absolute poverty
• Decreases trickle down effects incentives to invest decrease
• Doesn’t tackle root cause
• Laffer curve

Question 29

What are the causes of wealth + income inequality

Answer 29

• Simply higher wages which also allows to build up more wealth
• High wealth levels allow a high level of income
• Chance; buying asset at right time or lucky to inherit wealth
• Age: older earns higher income and more assets
• Country: developed country places you alr in top 5%

Question 30

What did Kuznets and Picketty say about the impact of economic growth on inequality

Answer 30

Kuznets hypothesis says that as society develops and moves from agriculture
to industry, inequality increases as the wages of industrial workers rises faster than
farmers

Piketty discredited this theory by arguing that inequality rises as the
country develops as the rate of return on capital grows, so the rich get richer and
inequality increases.

Question 31

What is the significance of capitalism for inequality

Answer 31

● A capitalist economy leads to income inequality because of wage differentials and
wages vary as they are based on demand and supply
● Individuals also own resources and thus wealth differs based on the assets they
own
* inequality is essential for capitalis incentives to work
* but excessive inequality causes problems with efficiency and social justice.

Question 32

What is horizontal and vertical equity

Answer 32

· Horizontal equity is the equal treatment of equals
Vertical equity is the unequal treatment of unequal’s

Question 33

What is the relevance of housing to inequality

Answer 33

• House price inflation + income stagnation = serious intergenerational inequalities
• House price inflation has outstriped average earning with the ratio increasin from 6 to 9 and 7 to 13 in London
• One of the main stores of household wealth
• While renting improves the posiiton of landlorders and are not subject to the wealth tax
• 43% of renters in relative poverty while only 12% of homeowners are

Question 34

How much of the world’s carbon emissions do the world’s top 10% cause

Answer 34

richest 10 percent accounted for over half (52 percent) of the emissions added to the atmosphere between 1990 and 2015

Question 35

What is the Quintile Ratio

Answer 35

ratio of the average income of the richest 20% of the population to the average income of the poorest 20% of the population

An alternative measure is the average income of the richest 10% of the population to the average income of the poorest 10% of the population

Question 36

What is the Palma Ratio

Answer 36

This is the ratio of the richest 10% of the population’s share of gross national income divided by the poorest 40%’s share