4.2 Poverty and Inequality

Question 1

Define absolute poverty

Answer 1

Individuals or households are deprived of basic needs (less than $2.15)

Question 2

Define relative poverty

Answer 2

Households are poor in comparison to the rest of the population

Question 3

Define poverty line

Answer 3

The minimum level of income demmed necessary for acceptable S.O.L

Question 4

Define poverty trap

Answer 4

Discentives to work created through tax and benefit system, if income tax and benefits are too high

Question 5

Define equity

Answer 5

The fair distribution of resources in society. It involves bias in treatment of people dependent on their resources

Question 6

Define equality

Answer 6

The equal distribution of resources in society. It involves giving the same amount of resources to all people regardless of their requirements.

Question 7

cyclical and structural

Why would unemployment cause poverty

Answer 7

• Cyclical: in a recession, lack of AD in economy, firms layoff workers
• Structural: Manufacturing industry to financial services since 19th century–> may not have transferable skills to take these services sector jobs–> cannot access other jobs in economy–> lose Y + no training= long- term unemployment (Hysteresis theory)

Question 8

Causes in changes in absolute and relative poverty

Answer 8

• Age: If average Y grow, pensioners relatively poorer
• Low/ unwaged: Can be affected through trade/ globalisation and increase supply of labour through migration, differences in education/ skills and structural unemployment via globalisation
• Inequality
• Changes in the rate of economic growth: Through capitalism, inequality can lead to higher relative poverty, as owners of FoP can earn relatively more
• Economic development
• FDI: can reduce absolute absolute poverty through injections it creates and new jobs but MNCS may benefit most, as well income repatriated so this may be limited
• Increase trade
• Govt tax and benefits policies: Regressive taxation especially may affect low icnome earners more: increased benefits can help reduce absolute and relative poverty
• Changes in asset prices: lower assets P’s e.g. falling house P’s can reduce the wealth of the richer in society reduce relative poverty. Lower I.R. for saving have made bond holding people richer as D and P’s have risen (side effect of QE)

Question 9

Consequences of extreme poverty for development

Answer 9

• Low life expectancy and fewer years of healthy life expectancy
• Low school enrolment rates as families cannot afford education- widens the gender opportunity gap
• Low access to basic healthcare
• Vulnerability to loan sharks for families mired in debt
• Limited access to technology
• Threats to democracy and stable institutions
• Low real sepnding power limits the size of domestic markets for consumer G/S

Question 10

Consequences of high relative poverty for growth

Answer 10

• Causes a self-perpetuating poverty cycle–> limited access to healthcare and education–> volatile incomes, high debts + low savings
• Misallocation of scarce resources–> capital investment in society is skewed towards the preferences of the rich + low collateral- limits growth of enterpeneurship
• Social and political unrest/ tensions –> increases pressure on state welfare systems, rise of informal economy + high I.R. loans (e.g. doorstep lenders)

Question 11

Define income

Answer 11

Income is measured by the flow of earnings of individuals or households

Question 12

Define wealth

Answer 12

Wealth is measured by the stock of financial assets e.g. houses owned by individuals or households

Question 13

Define income inequality

Answer 13

Unequal distribution of income to households i.e. rent, wages, interest and profit

Question 14

Assets with market value that can generate income

Define wealth inequality

Answer 14

Differences in the stock of assets that households own

Question 15

Both income and wealth are mutually reinforcing

How does the accumulation of assets provide people with a stream of income in the future

Answer 15

• Shares provide capital growth, if the share P’s increase, and income growth through dividends
• Property provides capital growth through house price appreciation and income growth through rent
• The ownership of capital provides profit
• Savings provide interest

Question 16

How does human capital cause income inequality

Answer 16

• The skills, qualifications and experience of a worker increases their value to a firm (higher earning potential)
• Skilled workers tend to be more wage inelastic and can bid up their wage price
• Workers might increase their human capital by: attaining higher educational qualifications e.g. degree level or beyond, training, gaining experience in the workplace
• Human capital leads to wage differentials between workers

Question 17

How does pension payments cause income/ wealth inequality

Answer 17

State pension payments ensure a minimum standard of living for retirees resulting in a more equal distribution of income. Countries without it have a much higher percentage of pensioners living in poverty

Question 18

An organisation that represnts the interests of the work in an industry

How does trade unions cause income/ wealth inequality

Answer 18

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

Question 19

How does employment legislation cause income/ wealth inequality

Answer 19

Generally, the more workers are protected by law, the better the income distribution in an economy e.g. maternity benefits ensure that new mothers have a higher level of income during the first months of leave after a birth

Question 20

Explain how wage differentials exist between workers

Answer 20

• The demand and supply of labour create differences in the wage rates of workers.
• High D and low S–> wages are inelastic–> wage rate is bid up
• Low D and high S–> wages are elastic–> wage rate is bid down
• The MRP of skilled workers> unskilled workers
• MRP of men> women (many women work in lower skilled part- time jobs as they combine work with bringing up a family)

Question 21

Causes of wealth inequality

Answer 21

1. Inheritance
2. Income: as Y rise, people are more willing and able to acquire wealth e.g. property
3. Marriage: people often marry into wealth, commonly wedding those with similar levels of human capital or social standing

Question 22

What does the Lorenz curve represent

Answer 22

A graphical representation of the relationship between cumulative percentage of income to cumulative percentage of population

Question 23

What does the Gini coefficient measure

Answer 23

• Measures the extent to which the distribution of income within an economy deviates from a perfectly equal distribution
• Measures the area between the Lorenz curve and the line of prefect equality, expressed as a percentage of the maximum area under the line.

Question 24

What does a Gini coefficient of 0 and 1 represent

Answer 24

0 means perfect equality
1 means perfect inequality

Question 25

Why is some level of inequality desirable

Answer 25

• Incentive to work hard in order to recieve higher reward will help increase economic growth which can result in reduced absolute poverty
• More innovation due to the profit motive for firms and investors leads to more competitive industry and faster economic growth
• Lower taxes or less redisribution may encourage entrepreneurs to relocate to the country
• Rising S.O.L in a largely market based economy

Question 26

Explain why under capitalism, inequality is inevitable

Answer 26

• 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

Question 27

chain of reasoning

Explain the drawbacks of rising inequality

Answer 27

According to Stiglitz and Keynes, via their higher marginal propensity to consume, it’s the poorest who can drive growth and multiplier effects if they are given additionally money. The rich save, which is a leakage in the circular flow of income, and they may also utilise offshore accounts and hire financial advisors to minimise their tax bill. Inequality linked to lack of opportunity has negative effects on productivity as it might prevent firms utilising the most talented pool of labour via lower income families having less access to higher education for example. If the inequality is due to lack of public provision via public and merit goods and not enough progressive taxation, it risks increasing poverty in an economy. At its extreme, the possible rising crime and disaffection will eventually damage an economy via public resources and money needed to deal with this.