4.2.2: Inequality

Question 1

What is income?

Answer 1

A flow of money (e.g. wages, rental income).

Question 2

What is wealth?

Answer 2

A stock of assets (e.g. savings, ownership of assets).

Question 3

What is the Lorenz curve (diagram)?

Answer 3

Question 4

Line A:
Line B:

Answer 4

Line A: perfectly equal society.
Line B: degree of inequality.

Question 5

What is the Gini coefficient?

Answer 5

Area A / Area (A+B).

Question 6

How is the Gini coefficient measured?

Answer 6

0-1: the bigger the coefficient, the more unequal the country.

Question 7

A Gini coefficient of 0.4 or above indicates…

Answer 7

… political instability and growing social tensions.

Question 8

What are causes of income inequality within a country?

Answer 8

-Differing wages.
-Age (older = more money).
-Power of trade unions.
-Ownership of assets.

Question 9

What are causes of income inequality between countries?

Answer 9

-Developed countries tend to favour each other when trading.
-Education & training.
-War & natural disasters.

Question 10

What is the impact of economic change and development on inequality?
-Kuznets Hypothesis.
-Evaluation.

Answer 10

-Kuznets Hypothesis: as society develops from agriculture to industry, inequality increases, as the wages of industrial workers rises faster than farmers. Thus, wealth is redistributed through taxation and government spending and so inequality falls.
-Evaluation: inequality rises as the rate of return on capital grows, so the rich get richer and inequality increases.

Question 11

What is the significance of capitalism on inequality?

Answer 11

-Wages are based on demand & supply.
-Wealth differs based on the assets people own. Wealth can be passed on or gained through saving of incomes.
-A degree of inequality is necessary to encourage work, but excessive inequality causes problems with efficiency and social justice.