4.2 Poverty and Inequality Flashcards
Define absolute poverty
Individuals or households are deprived of basic needs (earn less than $2.15 per day)
Define relative poverty
Households are poor in comparison to the rest of the population
Define poverty line
The minimum level of income deemed necessary for acceptable S.O.L
Define poverty trap
Discentives to work created through tax and benefit system, if income tax and benefits are too high
Define equity
The fair distribution of resources in society. It involves bias in treatment of people dependent on their resources
Define equality
The equal distribution of resources in society. It involves giving the same amount of resources to all people regardless of their requirements.
cyclical and structural
Why would unemployment cause poverty
- 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)
Causes in changes in absolute and relative poverty
- 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)
Consequences of extreme poverty for development
- 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
Consequences of high relative poverty for growth
- 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)
Define income
Income is measured by the flow of earnings of individuals or households
Define wealth
Wealth is measured by the stock of financial assets e.g. houses owned by individuals or households
Define income inequality
Unequal distribution of income to households i.e. rent, wages, interest and profit
Assets with market value that can generate income
Define wealth inequality
Differences in the stock of assets that households own
e.g. property, stocks, and pensions
4 marks
Using your own examples, explain the difference between wealth and income inequality
- Wealth inequality is the differences in stock of assets that households own
- E.g. properties, stocks, pensions
- Income inequality is the uneven distribution of income (meaured by flow of earnings) to households
- E.g. Rent, wages, interest payments and dividends
Both income and wealth are mutually reinforcing
How does the accumulation of assets provide people with a stream of income in the future
- 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
How does human capital cause income inequality
- 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
How does pension payments cause income/ wealth inequality
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
An organisation that represnts the interests of the work in an industry
How does trade unions cause income/ wealth inequality
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
How does employment legislation cause income/ wealth inequality
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
Explain how wage differentials exist between workers
- 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)
Causes of wealth inequality
- Inheritance
- Income: as Y rise, people are more willing and able to acquire wealth e.g. property
- Marriage: people often marry into wealth, commonly wedding those with similar levels of human capital or social standing
What does the Lorenz curve represent
A graphical representation of the relationship between cumulative percentage of income to cumulative percentage of population
What does the Gini coefficient measure
- 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.
