4.2.2 - Inequality Flashcards
Explain the difference between wealth and income inequality
1.) Wealth is the value of a stock of assets owned , e.g. ownership of property, shares in business, savings in bank account, cars, furniture
Wealth inequality is the uneven distribution of wealth (assets) in a population. The less equal the distribution, the higher the wealth inequality
2.) Income is a flow of money going to the factors of production , e.g. wages and salaries from jobs, rental income from properties, interest from savings
Income inequality is the uneven distribution of income in a population. The less equal the distribution, the lower the income inequality
Name two measurements of income inequality
. Gini Coefficient
. Lorenz curve
Explain the Gini Coefficient
. Ranges from 0 to 1 with 0 meaning equal income and 1 meaning total inequality (one person has all the income whilst everyone else has no income )
. The higher the number, the higher the level of inequality
. Sometimes the Gini coefficient index is used; it is instead out of 100 (Gini coefficient * 100)
Explain the Lorenz Curve
. A graphical representation of the distribution of income or wealth in a population
. The x axis is cumulative percentage of households, whilst the y axis is the cumulative percentage of income.
. A 45 degrees straight line represents total equality
. The greater the deviation from the 45 degrees line the higher the level of inequality.
- Refer to figure 3 in page 449
Causes of income inequality within and between countries
1.) Government policy - the extent to which government redistributes income through taxes and benefits affect the distribution of income
2.) Household composition - An individual may earn a higher salary, however he or she may have to support a large family meaning that the income per person in the household will be low.
3.) Non - workers - People who do not work such as pensioners tend to receive lower incomes than those in work.
4.) Earned Income - Some workers earn more than others depending on various factors :
Education attainment (e.g. university qualification) tends to give higher incomes in comparison to unqualified individuals as you are more employable in higher paying jobs. The number of hours worked also determines how much income you get. A full time worker earns more than a part time one
Causes of wealth inequality within and between countries
. Inheritance - The more an individual inherits, the higher the likely wealth. This is usually your parents’ house. But you can also inherit knowledge and work ethics, which can can lead to wealth
. Income levels - The higher the level of income, the more likely that the individual will accumulate assets. A person with a higher income is more likely to put aside a mortgage for a larger house
. Chance - A houseowner in Chelsea will have been luckier than an owner in Southampton as house prices have increased much faster.
Significance of capitalism for inequality
1.) Inequality in a free market is inevitable, since people with higher skills and abilities attract higher wages, whereas those will poor skills levels are a less employable and earn less.
. Therefore, inequality is essential in a capitalist system to provide an incentive for individuals to work due to the financial reward. If every worker received the same wage there would be no incentive to learn new skills and work hard at a a job.
. This incentive can also lead to better innovation and entrepreneurship which can lead to a comparative advantage in trade and growth
. There will be a higher GDP if there is more investment from risk taking incentivised firms.
2.) However, if there inequality due to inheritance in a capitalist society such as USA, it would lead to disincentive to work. This means that labour productivity fall and unemployment may fall as the needs of individuals are met. This would mean less tax revenue if less income is generated, which means government spending is reduced, reducing AD causing economic decline
Impact of Economic Change and development on inequality
In economic developed countries, inequality tends to be lower as there is the redistribution of income through taxation.
Furthermore, the state can provide resources such as a welfare benefits, education and healthcare to bring people out of poverty and reduce inequality in doing so.
Four Disadvantage of inequality
. Consumption in the economy would be low. This is at higher levels of income, the needs of individuals are met, which reduces the marginal propensity to consume, reducing consumption. This would reduce AD, which leads to economic decline
. Furthermore, if there inequality due to inheritance in a capitalist society such as USA, it would lead to disincentive to work. This means that labour productivity fall and unemployment may fall as well as the needs of individuals are met. This would mean less tax revenue if less income is generated, which means government spending is reduced, reducing AD causing economic decline
. High levels of inequality linked with crime as it simulates social competition
. Welfare benefits needed to reduce inequality
