7 - Distribution of Wealth

Question 1

What is Equality?

Answer 1

Everyone is treated the same way, regardless of need or any other individual difference.

Question 2

What is Equity?

Answer 2

Fairness in the overall distribution of income and wealth.

Question 3

What is Income?

Answer 3

A flow of money going to factors of production.

Question 4

What are the examples of income?

Answer 4

Wages and salaries, welfare payments, profits for businesses or corporations, dividends distributed to shareholders, rental income, interest payments.

Question 5

What is Wealth?

Answer 5

A stock concept, the combined total of every asset you own + income.

Question 6

What are the different ways in which wealth can be held?

Answer 6

Savings in commercial bank deposits, ownership of shares issued by stock market companies, ownership of property, real estate. Wealth in corporate bonds or government bonds.

Question 7

How much world income do the poorest 2/3 of people have?

Answer 7

Less than 13%.

Question 8

How much world income do the richest 1% have?

Answer 8

Nearly 15%.

Question 9

What does the Gini Coefficient graph suggest?

Answer 9

That inequality often rises during a phase of rapid industrialisation and urbanisation. There may be a point when increased welfare provision may lead to a fall in overall inequality.

Question 10

What is the Lorenz Curve?

Answer 10

Gives a visual interpretation of income or wealth inequality, diagonal line shows a situation of perfect equality of income - 50% of population has 50% of income.

Question 11

How do you calculate the Gini Coefficient on the Lorenz Curve?

Answer 11

Area A divided by Area A+B.

Question 12

What does the Gini Coefficient do?

Answer 12

Condenses the entire income distribution for a country into a single number between 0-1. The higher the number, the greater the degree of inequality.

Question 13

What does 0 mean?

Answer 13

Everyone has the same income.

Question 14

What does 1 mean?

Answer 14

A single individual receives all the income.

Question 15

What is seen as a tipping point to lead to social tension?

Answer 15

Above 0.4.

Question 16

How does inequality cause market failure?

Answer 16

Social unrest, civil disobedience, self perpetuating poverty cycle, loss of allocative efficiency.

Question 17

How does Social unrest cause market failure?

Answer 17

Breakdown in trust due to a huge gap in living standards between rich and poor. Creates external costs - rising spending on policing.

Question 18

How does the poverty cycle cause market failure?

Answer 18

Poorer families have limited access to healthcare and education. Under consumption of merit goods. Volatile incomes can lead to high debts, paying very high interest rates.

Question 19

How does loss of allocative efficiency lead to market failure?

Answer 19

Capital investment and production is increasingly skewed towards meeting the preferences of the rich. Low collateral - limits entrepreneurship, especially in poorer localities.

Question 20

What are the underlying causes of rising inequality?

Answer 20

Tax system in UK is less progressive than 20 years ago. High company profits, surging executive pay. Regressive effects of high inflation, widening urban - rural income divide, market failures in education and housing.

Question 21

What are the drawbacks of the Gini Coefficient?

Answer 21

It doesn’t measure absolute wealth.

Question 22

Which factors influence the distribution of income?

Answer 22

Factors of production, distinction between earned and unearned income, wage and salary differentials, globalisation.

Question 23

How do factors of production influence the distribution of income?

Answer 23

Distribution of income between different factors of production. Owners of large pieces of land receive large incomes in the form of rent - putting them in the top income quintiles.

Question 24

How does a distinction between earned and unearned income influence the distribution of income?

Answer 24

Differences in unearned income depend primarily on the distribution of wealth.

Question 25

How do wage and salary differentials influence distribution of income?

Answer 25

Differences in labour productivity, which determine the relative position of the demand curve, such as the difference between pilots and cleaners.

Question 26

How does globalisation influence distribution of income?

Answer 26

Low paid workers in the UK are in competition with incoming workers from poorer parts of the world - A call centre worker in India, serving a UK market, earns a lot less than a UK call centre worker.

Question 27

What do the markets for airline pilots and cleaners show?

Answer 27

Productivity of pilots is higher than an aircraft cleaner. Demand for pilots is less wage elastic than demand for cleaners. Supply of airline pilots is lower and more inelastic. Supply of cleaners is higher, more wage elastic.

Question 28

Which factors affect the distribution of wealth?

Answer 28

Ability to benefit from capital gains, Private pension assets, inheritance and gifts, wealth vs income tax.

Question 29

How does ability to benefit from capital gains affect the distribution of wealth?

Answer 29

Occurs when the value of an asset increases. Most consumer goods depreciate in value after they're purchased, not land. This increases inequality.

Question 30

How do private pension assets affect the distribution of wealth?

Answer 30

Company pension schemes have not been made available until recently, and low paid workers didn't contribute to pension schemes.

Question 31

How does inheritance and gifts affect the distribution of wealth?

Answer 31

'New wealth' such as entrepreneurs and 'old wealth' such as aristocracy all pass on assets and wealth, meaning new wealth is created.

Question 32

How does wealth vs income tax affect the distribution of wealth?

Answer 32

Wealth is lightly taxed, and there are many loopholes. Wealthier people can also afford to pay accountants to move money around.

Question 33

What are the benefits of a more equal distribution of income and wealth?

Answer 33

Faster economic growth through increased consumption and increased living standards. More opportunity for people with less wealth.

Question 34

What are the costs of a more equal distribution of wealth?

Answer 34

Reduced incentives to work hard among better off and the poor. Reduced rates of economic growth. Faster economic growth can be achieved by increasing inequality further.

Question 35

What is Poverty?

Answer 35

The state of being extremely poor and not having enough money or income t meet basic needs.

Question 36

What is Absolute Poverty?

Answer 36

Severe deprivation of basic human needs, such as food, safe drinking water, sanitation, shelter, education, and information.

Question 37

What is Relative Poverty?

Answer 37

Occurs when income is below a specified proportion of average income.

Question 38

What are the causes of poverty in the UK?

Answer 38

Old age, unemployment, low wages.

Question 39

How does old age cause poverty?

Answer 39

Many people lack a private pension, rely on state pension. Pensions used to rise at the rate of economic growth, then rose by the rate of inflation. Now, it's the highest out of wages, CPI, or 2.5%.

Question 40

How does unemployment cause poverty?

Answer 40

Unemployment benefits are lower than the pay received before losing their jobs. This means an increase in unemployment leads to a rise in poverty. Absolute and relative poverty can be reduced by fast economic growth and job creation.

Question 41

How do low wages cause poverty?

Answer 41

Creates relative poverty, as they still have income. Includes many skilled workers.

Question 42

What are the effects of poverty?

Answer 42

Educational deprivation, health deprivation, community effects.

Question 43

How does poverty affect educational deprivation and outcomes?

Answer 43

Children of poorer backgrounds lag behind at all stages of education. Poorer children are estimated to be nine months behind children from wealthier backgrounds.

Question 44

How does poverty affect health deprivation?

Answer 44

Poverty is also associated with a higher risk of illness and premature death. Children born in the poorest areas of the UK weigh 200g less than children in rich areas.

Question 45

What effect does poverty have on comunities?

Answer 45

Fuel poverty impacts children, low income families have to make a choice between food and heating, missing school trips, elderly are the main group suffering from fuel poverty. Bed blockers mean that some elderly people continue to occupy hospital after they're finished.

Question 46

How does fiscal drag affect poverty?

Answer 46

Inflation rises, but taxes go up, so an individual is worse off in real terms if the government fails to increase the tax allowance with inflation. It can cause the poverty trap.

Question 47

What is the poverty trap?

Answer 47

It traps the low wage workers in relative poverty, the overlap between the income tax threshold and the means tested welfare benefits ceiling.

Question 48

What do low paid workers suffer from in the poverty trap?

Answer 48

They pay income tax, and national insurance, and lose the right to claim benefits.

Question 49

What does unemployment trap contain?

Answer 49

Unwaged benefit claimants who choose unemployment. They decide they're better off out of work, living on benefits.

Question 50

How can low paid workers in employment escape the earnings trap?

Answer 50

By giving up declared work to claim unemployment benefits.

Question 51

What are the consequences of government policy which affect poverty, income and wealth distribution?

Answer 51

Redistribution policies can make distribution more equal, reducing relative poverty. Reducing incentives to work, however, may cause slower economic growth, and loss of international competitiveness. Ultimate aims of redistributive policies.

Question 52

Which policies can be used to lower inequality?

Answer 52

Higher minimum wage, free provision of services, higher rates of income tax, investment in training, subsidies for childcare.

Question 53

What is Fuel Poverty?

Answer 53

If a household has to spend more than 10% of its' income on energy, it's in fuel poverty. It depends on household income, fuel prices, energy requirements.

Question 54

Which policies can be used to reduce fuel poverty?

Answer 54

Financial assistance grants, subsidies or rebates to help lower cost of heating. Energy efficiency programmes, focusing on efficiency of homes through insolation.