4.2.2 Inequality

Question 1

Wealth inequality

Answer 1

Wealth is likely to be more unequally distributed than income because assets that make up wealth can be accumulated over time. People who are wealthy now can generate an income from those assets and as long as income exceeds expenditure, they are able to build up a stock of assets. This accumulation of wealth can occur over successive generations through inheritance.

Question 2

Income inequality

Answer 2

Income is a ​flow ​of earnings, whilst wealth is a ​stock of asset. Income inequality refers to the extent to which income is distributed in an uneven manner.

Question 3

Measurements of Income inequality

Answer 3

Information on distribution of income and wealth tends to be presented in percentiles, deciles and quintiles.
- Lorenz curve
- Gina coefficient

Question 4

The Lorenz curve

Answer 4

This shows the cumulative percentage of the population plotted against the cumulative percentage of income that those people have.
A perfectly equal society would have a straight line from corner to corner; the degree of the bend away from that straight line indicates the degree of inequality.

Question 5

The Gini coefficient

Answer 5

A/(A+B)
- area between line of perfect equality and Lorenz curve divided by all area under line of perfect equality i.e. (A+B)
- It is measured between 1 and 0: the bigger the coefficient, the more unequal the country.

Question 6

Causes of wealth and income inequality within countries

Answer 6

Wages
Wealth levels
Chance
Age

Question 7

Wages - causes of wealth and income inequality within countries

Answer 7

• Some workers simply earn more than others. This can be because of higher educational achievements, because they work longer hours or because their skills are more in demand. Those who aren’t in work will have a lower income than others e.g. pensioners or those on benefits. Moreover, the higher the level of income, the more someone can save and thus the more wealth they can build up.
• Those on high incomes will be able to build up a stock of assets whilst those on lower incomes may have to spend most of their money on everyday items like food.

Question 8

Wealth levels - causes of wealth and income inequality within countries

Answer 8

• Someone who already has a high level of wealth, whether through inheritance or saving, is able to build up larger wealth than those on lower levels of wealth. For example, they may undertake more risky investment which will give a higher rate of return. They could buy property in London which they hope will rise in price and make a huge return. Those with lower levels of wealth are unable to do so. Inheritance often allows high levels of wealth.
• Moreover, high levels of wealth mean people can earn rent and interest on their assets and so therefore see increased income.

Question 9

Chance - causes of wealth and income inequality within countries

Answer 9

• Those who bought houses in the right area or bought the right assets will see a huge increase in the price of their assets and hence an increase in their wealth. They may have been lucky to inherit wealth.
• Those who chose the right sort of job will have seen their income rise higher than other areas.

Question 10

Age - causes of wealth and income inequality within countries

Answer 10

• Income: Working adults at the peak of their career will earn a higher income than those who have just started.
• Wealth: Those who are older will have had a chance to build up more assets, although some of this stock may have been used up to pay for retirement.

Question 11

Causes of wealth and income inequality between countries

Answer 11

• Some countries have been held back by wars, droughts, famines and earthquakes.
• Certain social groups may have been excluded and marginalised.
• Developed countries tend to favour each other when trading, negotiating etc. and this helps them to develop more than countries who are not involved in the agreements.

Question 12

Impacts of economic change and development

Answer 12

● The ​Kuznets hypothesis says that as society develops and moves from agriculture to industry, inequality increases as the wages of industrial workers rises faster than farmers. Then, wealth is redistributed through taxation and government spending and so inequality falls.
● However, ​Piketty ​discredited this theory by arguing that inequality rises as the country develops as the rate of return on capital grows, so the rich get richer and inequality increases.

Question 13

Significance of capitalism for inequality

Answer 13

● A capitalist economy leads to income inequality because of ​wage differentials​. Wages vary as they are based on demand and supply, and demand and supply vary for different jobs.
● Individuals also ​own resources and thus wealth differs based on the assets they own. Wealth can be passed on or gained through saving of incomes.
● It is argued that equality can never be achieved in a capitalist society where the possibility of having more is important to encourage hard work. Without the incentive to gain more, people will not try hard or take risks since they have no reason to and this means the economy won’t grow; ​inequality is essential for capitalism to work​.
● A degree of inequality is necessary and desirable, but ​excessive inequality causes problems​ with efficiency and social justice.