4.2 Poverty and Inequality

Question 1

Impersonal markets

Answer 1

Markets where transactions occur independently of personal relationships, relying on objective factors instead

Question 2

What’s personal distribution of income?

Answer 2

The overall distribution of the total income of all the individuals
Focuses on how this income is spread between them

Question 3

What are the causes of inequality of personal distribution of income?

Answer 3

Varied income
Non workers
Physical and financial wealth
- easier to accumulate wealth with these
Household composition
- large families have less income per person
Government policy
- taxes and benefits change incomes
Competition of markets
- imperfectly competitive vs perfect distributions

Question 4

What are the causes of wealth inequality?

Answer 4

Property wealth
Physical wealth
- physical valuables other than property
Financial wealth
- monetary valuables
Private pension wealth
Income levels
Wealth levels
- increase more with them higher
Inheritance
Chance

Question 5

What’s the Lorenz curve?

Answer 5

A curve measuring how much the cumulative proportion of income increases when the cumulative proportion of households increase
Creates a curve due to inequality

Question 6

What’s the perfect equality line?

Answer 6

In a world with no inequality, where everyone earns the same
Curve is perfectly straight at 45°

Question 7

What’s the perfect inequality line?

Answer 7

In a world where the richest household earned 100% of income
Vertical line at 100%

Question 8

What’s the Gini Coefficient?

Answer 8

Area A/(Area A +Area B)
Gives a coefficient measuring the inequality of an economy
The higher the coefficient, the greater inequality

Question 9

What’s absolute poverty?

Answer 9

When individuals can’t consume sufficient necessities to maintain life
- The income on this varies with countries

Question 10

What’s relative poverty?

Answer 10

The relatively poor individuals at the bottom end of income scale
- always present in society

Question 11

What are the 2 measures of relative poverty?

Answer 11

Finding median of income then x0.60 (UK and EU)
- multiplier varies

Consider necessities people have to buy to not be considered poor

Question 12

What are the causes of poverty?

Answer 12

Unemployment
Lack of human capital (education, training)
Health problems
Being dependant on others
Varied countries and regions

Question 13

What causes absolute poverty rates to change?

Answer 13

Falls when GDP increases
- but not a guarantee
How well the state reach people who can’t work etc
- pensions
- free healthcare
- social housing

Question 14

What causes absolute relative rates to change?

Answer 14

Wages may not increase or alter
Cuts in benefits
Tax raises

Question 15

What is equity?

Answer 15

Fairness.
You get what is needed for you, not get the same thing

Question 16

What’s horizontal equity?

Answer 16

Identical treatment of identical solutions
Individuals with similar circumstances or incomes should be treated equally

Question 17

What’s vertical equity?

Answer 17

Different treatment for different situations

Question 18

Why may Govs want to intervene to change distribution of wealth and income? 4 reasons

Answer 18

• Absolute poverty may exist
• Relative poverty may be too great
• Horizontal equity may not exist
• Current distribution may conflict economic efficiency

Question 19

What’s a progressive tax?

Answer 19

Tax rate increases as individuals income rises

Question 20

What’s a regressive tax?

Answer 20

Tax rate decreases as individuals income rises

Question 21

What’s a proportional tax?

Answer 21

Tax rates are a constant, no matter the individuals wage

Question 22

How can the gov use taxes to reduce income and wealth inequality?

Answer 22

Increase progressive taxes
Decrease regressive taxes
Inheritance tax

Question 23

How can gov expenditure decrease income and wealth inequality?

Answer 23

Monetary benefits
Social security and National insurance benefits
Act more precisely
- spend money on housing for elderly
- help children benefits
Gov activity of provision of goods and services

Question 24

What are the 9 ways the gov can intervene to reduce income and wealth inequality?

Answer 24

Gov Expenditure
Taxation
Raising min wage
Max wages
Benefits
Equal pay legalisation
Passing trade union-friendly legalisation
Price controls on essentials
Private sector goods / services can be provided

Question 25

What’s trickle down economics?

Answer 25

The idea that policies benefiting the wealthy will eventually benefit the wider economy
- as the invest more, create jobs, spend more
- economic growth which ‘trickles down’ to lower income groups

Question 26

How does redistributing income increase total utility?

Answer 26

Law of diminishing marginal returns suggests an extra pound spent by the rich is less utilises them vs the poor