4.2 - Poverty and Inequality

Question 1

What is absolute poverty?

Answer 1

• 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

Question 2

What is relative poverty?

Answer 2

• Less than 60% of the average income in the UK
• Australia - <50% of average income

Question 3

What are the most important factors influencing poverty rates?

Answer 3

• Infrastructure
• Education & Training
• Aid

Question 4

How does infrastructure influence poverty rates? Give real world example.

Answer 4

• 1960s North Korea farmers walked long distances to collect water -> lower outputs
• Started the New community movement (1970) - gave raw materials to villages across South Korea -> better systems, bridges etc
• India’s cellular radio towers -> better communications + call centre building

Question 5

How does education influence poverty rates? Give real world example.

Answer 5

• 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

Question 6

How does aid influence poverty rates? Give real world example.

Answer 6

• Somalia received $1.3bn in aid -> 70% disappeared (corruption)

Question 7

What is income?

Answer 7

The flow of money received each year

Question 8

What is income inequality? Give real world examples.

Answer 8

• 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

Question 9

What does the Lorenz curve show?

Answer 9

• 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

Question 10

What is the formula for gini coefficient?

Answer 10

G= A/A+B

Question 11

What do gini coefficient values mean?

Answer 11

• Always between 0 and 1
• Gini coefficient of 1 represents perfect income inequality
• 0 = perfect income equality

Question 12

What is wealth?

Answer 12

Someone’s stock of assets in current time

Question 13

What is wealth inequality?

Answer 13

When wealth is shared unequally between a population

Question 14

What factors influence inequality?

Answer 14

• National minimum wage
• Assortative mating
• Progressive income tax
• “R<G” hypothesis
• Inheritance

Question 15

How does national minimum wage influence inequality?

Answer 15

• NMW act (1998) - £7.50 per hour for 26yrs+
• Poorest earners receive more

Question 16

How does assortative mating influence inequality?

Answer 16

• When successful, rich women mate with talented, rich men -> rich get richer -> increased income inequality

Question 17

How does progressive income tax influence inequality?

Answer 17

• Tax rate increases as you earn
• 0% tax for those on less than £11,850, 20% for those above
• 40% tax on every £ earnt above £46, 350
• 45% tax above £150,000
• Extra tax revenue -> government spending

Question 18

How does R>G hypothesis influence inequality?

Answer 18

• 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

Question 19

How does inheritance influence inequality?

Answer 19

• 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