4.2 - Poverty and Inequality Flashcards
What is absolute poverty? Include stats.
- Global measure of poverty
- Anything below $2.15 poverty line at 2017 GDP measured at PPP
- Unable to afford the most basic things we all need - 700 million in absolute poverty (2017) -> more than 96% from developing countries
What is relative poverty?
- Less than 60% of the average income in the UK
- Australia - <50% of average income
What are the most important factors influencing poverty rates?
- Infrastructure
- Education & Training
- Aid
How does infrastructure influence poverty rates? Give real world example.
- 1960s North Korea farmers walked long distances to collect water -> lower outputs
- Also hard to sell their crops - few roads + of their buyer lived across the river -> had to travel miles down the river before they found a bridge
- Started the New community movement (1970) - gave raw materials to villages across South Korea -> better systems, bridges etc -> rise in production & transportation -> incomes rose -> poverty fell
- India’s cellular radio towers -> better communications + call centre building
How does education influence poverty rates? Give real world example.
- Lost Generation (1975) in Madagascar
- French teachers banned in schools -> school leavers couldn’t get high paid jobs which required french to be spoken -> lower skillset -> lower productivity -> increased unemployment -> lower incomes -> absolute poverty
How does aid influence poverty rates? Give real world examples.
- Aid -> e.g. UK donated £374m to Pakistan (2015) -> trained & employed more doctors & teachers -> better skills & knowledge + better health -> increased productvity -> demand higher salaries (Pakistan’s GDP per capita rose by over $100 that year) -> poverty fell
- Somalia received $1.3bn in aid (2011) -> 70% disappeared (corruption)
What is income?
The flow of money received each year
What is income inequality? Give real world examples.
- Occurs when the best paid workers take home more income than the rest of the country’s workers
- In the USA the average CEO earned 271x more than the average population worker
What does the Lorenz curve show?
- Measures income inequality across countires
- Takes a group of people & plots all of their income from lowest to highest
- y-axis: cumulative income
- x-axis: population
What is the formula for gini coefficient?
G= A/A+B
What do gini coefficient values mean?
- Always between 0 and 1
- Gini coefficient of 1 represents perfect income inequality
- 0 = perfect income equality
What is wealth?
Someone’s stock of assets in current time
What is wealth inequality?
When wealth is shared unequally between a population
What factors influence inequality?
- National minimum wage
- Assortative mating
- Progressive income tax
- “R<G” hypothesis
- Inheritance
- Social benefits
How does national minimum wage influence inequality? Include data (what is the current NMW?)
- NMW act (1998) - £7.50 per hour for 26yrs+
- Currently NMW rose from £11.44 -> £12.21 (21yrs+)
- Poorest earners receive more
- NMW -> increased costs for UK companies -> decreases profit made -> rich managers see a decrease in their salary -> narrows inequality gap
How does assortative mating influence inequality?
- When successful, rich women mate with talented, rich men -> rich get richer -> increased income inequality
How does progressive income tax influence inequality?
- Tax rate increases as you earn
-Personal Allowance - up to £12,570 = 0%
Basic rate - £12,571 to £50,270 = 20%
Higher rate - £50,271 to £125,140 = 40%
Additional rate - over £125,140 = 45% - Extra tax revenue -> government spending
How does R>G hypothesis influence inequality?
- If you start off with lots of wealth, it’s easier to end up with even more
- Many wealthy individuals, between 1950-2012 reached an average rate of return of 5.3% on assets - world incomes have had a growth rate of 3.8%
- If r>g rich people with lots of assets will get wealthier at a higher rate than poor people without any
How does inheritance influence inequality?
- Inheritance means people receive lots of wealth and can use this to generate more wealth
- R = 5.3%, g = 3.8%
- Picketty -> 90% of wealth is inherited
What is the difference between capitalists & capitalism?
- Capitalists: anyone who uses the factors of production in the hope of making money
- Capitalism: an economy that has capitalists in it
- Doesn’t exists in command economies!!
- Thrives in free market
How does capitalism lead to investment? (chains)
- Capitalism -> economic growth (via investment -> increased AD)
- Investment -> increased enployment -> increased consumption -> higher profits -> rise in investment
- Capitalism -> incentive to innovate
How does capitalism lead to inequality?
- Creates income & wealth inequality
- Income inequality as firms control wages
- Capitalism -> winners & losers
