4.2.2 Inequality Flashcards
Income
The amount of money an individual receives over a set period of time, e.g. per week or per year.
- Income comes from many sources, e.g. wages, interest on bank accounts, dividends from shares and rent from properties.
Wealth
The monetary value of assets held – assets can include property, land, money and shares.
Factors affecting the distribution of income
- People earn different wages – certain skills are more in demand than others, so workers with those skills are likely to receive higher wages.
- Unwaged people (e.g. unemployed or pensioners) often rely on state benefits, so their incomes tend to be lower.
- Tax and state benefits – in the UK there is a progressive tax system so those with higher incomes are taxed a higher percentage of their earnings over certain levels. Some of this tax is then redistributed as benefits, e.g. to the unemployed, or to people with disabilities.
- Average full-time earnings differ considerably between different regions. In 2019, the highest paid regions were London and the South East. The North East and Northern Ireland were the two lowest paid regions.
Factors affecting the distribution of wealth
- Wealth often earns income – e.g. shares may increase in value and generate more income. Those who earn income from their wealth could invest that income again (e.g. by buying more shares), which in turn will generate more income, and so on. This means the wealthy become even wealthier, whereas those with low wealth don’t have much (if anything) to invest, so their wealth will only grow by a small amount (if at all).
- Assets tend to increase in value more quickly than income rises.
- In the UK, income is taxed, but wealth isn’t – so it’s much easier to redistribute income than wealth.
What is the Lorenz curve used for?
To represent the distribution of income graphically.
Explanation of the Lorenz Curve
Along the horizontal axis is the percentage of the population, and up the vertical axis is the total percentage of income.
The diagonal line represents complete equality – e.g. 10% of the population have 10% of the income, 40% of the 40% of the income, and so on.
The further the Lorenz curve is away from the diagonal, the greater the inequality in the country.
- In this graph, the lowest-earning 50% of the population earn only 8% of the country’s total income.
- So the highest-earning 50% earn 92% of the total income.
- This represents a large amount of income inequality.
What does this Lorenz curve show?
- In this graph, the lowest-earning 50% of the population earn only 8% of the country’s total income.
- So the highest-earning 50% earn 92% of the total income.
- This represents a large amount of income inequality.
Gini coefficient
A measure of inequality - found from the Lorenz curve.
What does a Gini Coefficient of 0 represent?
Complete equality – i.e. everybody earns the same income.
What does a Gini Coefficient of 1 represent?
Complete inequality – i.e. one person earns all the income in the country.
Equality
Where everyone is treated completely equally.
Equity
This relates to fairness - people have different circumstances, so it is more about people getting what is needed.
Difference between equity and equality?
Equality is positive (it’s objective and deals with facts), whereas equity is normative (it’s subjective and based on opinion).
Types of equity
- Horizontal equity – people with the same circumstances are treated fairly (i.e. they’re treated the same).
- Vertical equity – people with different circumstances are treated fairly but differently.
Positive impacts of the unequal distribution of wealth
1) Lower earners may feel that if they work harder they will be able to achieve a higher income. This may increase overall productivity.
2) It can also be an incentive for people to start their own business, as a way of increasing their wealth.
3) Some economists argue that higher incomes for richer people may encourage them to invest more in businesses. This will create jobs, meaning some of the wealth makes its way to poorer people – this is known as the trickle-down effect. It can reduce absolute poverty.
