4.2.1 & 4.2.2 Absolute And Relative Poverty & Inequality Flashcards
Absolute poverty
When a person’s continued daily existence is threatened as they have insufficient resources to meet their basic needs
Absolute poverty example
The world bank defines absolute poverty as living on below $2.10 a day.
- one in six people worldwide
Relative poverty
When a person’s standard of living is low compared with the average person in the same country
Relative poverty example
Households are considered to be below the UK poverty line if their income is 60% below the median household income after housing costs for that year.
Things that affect poverty
- employment levels
- levels of training & education -> wages
- health (physical or mental - ability to work)
- dependency (on people or state)
- inheritance (cycle of poverty- rich stay rich)
- levels of physical or intellectual capital in your country
- state of infrastructure in your country
- govt policy (pensions, housing, welfare, education, NHS, childcare, training, tax wages)
Income
(Flow concept)
Get income from land, labour, capital & enterprise
- propert rented out
- payment for work done (wages)
- shares in a business (profit)
- own a business (profit)
What we own
- Human capital
- Physical capital
- Financial capital
Sources of wealth
- Inheritance
- Saving
- Entrepreneurship
- Chance
Wealth inequality causes
- Inheritance
- Marriage
- Income inequality
- Chance
Causes of income distribution
Economic growth will reduce income inequality
- Wages of the lowest paid rise faster than the average wage
- Govt benefits are increased
- Econ growth creates job opportunities
- Minimum wages are increased
- Progressive taxes redistribute income
Economic growth will reduce income inequality (govt benefits increase)
Government benefits, such as; unemployment benefits, sickness benefits and pensions are increased in line with average wages.
Economic growth will reduce income inequality (econ growth creates job opportunities)
Economic growth creates job opportunities which reduce the level of unemployment. Unemployment and lack of employment are one of the biggest causes of relative poverty.
Economic growth will reduce income inequality (progressive tax redistributes income)
Progressive taxes redistribute income. Progressive taxes such as higher rates of income tax will take a higher percentage of income from the rich; this can be used to fund social spending, such as health care, education and welfare benefits which help to reduce income inequality.
Why economic growth may not reduce income inequality?
- Econ growth creates job opportunities
- Interest-bearing wealth
Why economic growth may not reduce income inequality? (Econ growth creates job opportunities)
Economic growth often creates the best opportunities for those who are highly skilled and educated.
- In recent years, in the UK, we have seen faster wage growth for highly paid jobs than unskilled jobs.
Why economic growth may not reduce income inequality? (Interest-bearing wealth)
The wealthy gain interest and dividends from their assets.
- This rent, interest and dividends = re-invest in increasing their wealth.
- For the wealthy, it is a wealth creating cycle – which increases their share of income.
- The economist Thomas Piketty argued that without government intervention the rate of return from wealth would lead to widening income and wealth inequality.
Problems of inequality
- Inequality arising from monopoly power
- Social problems
Problems of inequality (inequality arising from monopoly power)
If firms have monopoly power, they are in a position to set higher prices to consumers. This leads to a redistribution of income from consumers to the shareholders of monopolies. Here, the inequality is based on an unfair distribution of power in society. Even Adam Smith argued the government needed to regulate monopolies.
Problems of inequality (social problems)
Arguably inequality can lead to social friction. It can be a factor in precipitating riots or higher crime levels. In this case, all members of society lose out. This is more pressing if the inequality is perceived to arise out of unfair allocation of opportunities (e.g. inherited wealth, monopoly power)
Advantages of inequality
- Incentive effect
- Trickle down effect
Advantages of inequality (incentive effect)
If someone works harder and as a consequence receives a higher wage then this is not market failure. The promise of a higher wage is essential to encourage extra effort. By rewarding hard work, there will be a boost to productivity leading to a higher national output – so everyone can benefit.
Advantages of inequality (trickle down effect)
If some people gain extra income, then this can ‘trickle down’ to other people, e.g. if an entrepreneur sets up a business he may become a millionaire, but also will create jobs and provide incomes for other workers. There may be a gap between the highest and lowest earners. But, the lowest earners are still better off than without the entrepreneur. (more on trickle-down effect – which is quite controversial)
Causes of income distribution between households
- less tax on tax earners
- less nationalism (more executives)
- less real value of benefit
- geographical distribution
