4.2- Poverty and Inequality

Question 1

Define absolute poverty

Answer 1

Income below a certain threshold($2 a day) to access the most basic, life sustaining goods and services

Question 2

Define relative poverty

Answer 2

Income below a certain given average in society

Question 3

What are three causes of poverty?

Answer 3

1. )Unemployment
2. )Poor education/skills
3. )Poor health/healthcare
4. )Wage differentials(relative poverty)
5. )Born into poverty
6. )Tax cuts for the well off

Question 4

Define income

Answer 4

An individual’s income is the amount of money they receive over a period of time

Question 5

Define wealth

Answer 5

The value of somebody’s assets

Question 6

What are three reasons for income inequality?

Answer 6

1. )People earn different wages
2. )Unemployment
3. )Tax- Higher wages are taxed more
4. )Workers in the private sector earn more
5. )Different regions of a country have different average wages- People who work in London typically earn more

Question 7

What are the reasons for wealth inequality?

Answer 7

1.) Value of wealth increases more quickly than income 2.)Income is taxed but wealth is not

Question 8

What is the Lorenz Curve?

Answer 8

1. The lorenze curve is used to graphically represent the distribution of income
2. The diagonal line represents complete income equality
3. The curve represents the actual representation of income
4. The closer the curve is to the diagonal, the more income equality there is

Question 9

What is the Gini coefiicient?

Answer 9

Gini coeficient = (Area A)/(Area A + Area B)

0 = Perfect equality

1 = Perfect inequality

The closer the coefficient is to 0, the more equal income distribution is.

Question 10

What are three advantages of income inequality

Answer 10

1. Inequality provides incentives to work
2. It encourages enterprise as people start businesses
3. It encourages people to work instead of claim benefits
4. The rich get richer so they spend more on goods, which inderectly leads to an increase of jobs to produce these goods

Question 11

What are three disadvantages of income inequality

Answer 11

1. Absolute and relative poverty can stay high
2. It restricts econmic growth as people do not have funds to start businesses
3. As incomes rise, people spend money on imports which leave the circular flow of income
4. Crime is likely to increase as people do not have the money to buy the things the want

Question 12

What is the poverty trap?

Answer 12

• The poverty trap affects those who are in poverty
• When their wage increases, they have their benefits reduced. However, their wage only increases by a small amount
• In some cases, this leads to a drop in disposable income
• This creates a disincentive to find work

Question 13

Why is inequality ineviable in capitalism?

Answer 13

People with higher skills attract higher wages, whereas those with poor skill levels will earn less