4.2 - poverty and inequality

Question 1

What is income? Give examples

Answer 1

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

Question 2

What is wealth? Give examples.

Answer 2

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

Question 3

Explain what income inequality is. Give figures.

Answer 3

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

Question 4

What are the causes of income inequality?

Answer 4

-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.

Question 5

What is the lorenz curve?

Answer 5

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.

Question 6

What is the Gini coefficient?

Answer 6

= 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.

Question 7

What is the significance of capitalism for inequality ?

Answer 7

1. private property; people can own tangible assets e.g. land and financial assets e.g. shares
2. self interest; people widely assumed to act in their own rational self-interest
3. competition in markets; assisted by the entry/exit of firms from industries
4. the price mechanism; where prices in markets act as rationing, signalling and allocation devices.