7.1 The Distribution Of Income And Wealth Flashcards
What is the distribution of income?
How much income is divided between rich or poor or between different groups in society e.g on a regional, age or gender basis
What is the distribution of wealth?
How wealth is divided between rich and poor or between different groups in society e.g on a regional, age or gender basis
What is income?
The flow of money a person or household receives in a particular time period
What is wealth?
The stock of everything that a person or household owns at a particular point in time which has value
What are the two links between income and wealth?
You can add your income to your wealth
The more wealth you have the more investment income or unearned income you are likely to earn
Describe the cycle the rich benefit from?
Wealth increases income
Wealthy save
Saving adds to wealth
Describe the cycle the poor suffer from?
Low income means poor have to borrow
Borrowing adds to personal debt
Income is spent on repaying debt and consumption falls leading to any wealth they may have disappearing
What are the 4 Groups the world bank splits economies into?(done via measuring GNI)
High income
Upper middle income
Lower middle income
Low income
What type of economy is the UK
High income economy
Why can economic growth lead to more inequality?
Economic growth creates full employment which tends to benefit the incomes of the rich more than the poor
What influences the distribution of income?
-factors or production
-distinction between earned and unearned income
-wage and salary differentials
-globalisation and international migration of workers
How do factors of production influence the distribution of wealth?
The distribution of national income across the factor of production
Land holdings e.g real estate create an income of rent(puts large landownership at the top income quintiles)
-national income paid to workers has been falling since 1980s(due to rapid progress and global integration)
-Owners of capital receive income via dividend payments of shares they own
-entrepreneurs give themselves a salary
How does the distinction between earned and unearned income affect the distribution of income?
-earned incomes such as salaries are self-employed income
-unearned income is income derived from sources other than employment, including interest and investment income
-determinants of wages affect earned income
-differences in unearned income depend on inequality in the distribution of wealth
How do wage and salary differentials affect the distribution of income?
-labour productivity which determine the relative positions of the demand curve
-portions of the supply curve of the job
How does globalisation and the international migrant workers affect the distribution of income?
They have widened the differences in wages and salaries to different groups of workers
E.g workers serving UK market in India get less than UK workers in market
Describe the inequality in the distribution of wealth?
The distribution of wealth is extremely unequal
What type of concept is wealth?
A ‘stock’ concept
What concept is income?
“Flow concept”
What are the factors influencing wealth?
-the ability to benefit from capital gains
-private pensions
-inheritance gifts and luck
Wealth taxation v taxation of income
How does the ability to benefit from capital gains influence the distribution of wealth?
Most consumer durable goods deprecate in value after they are purchased
-value of land and property generally increases
Ability to benefit from capital gains creates more welath
When does a capital gain occur?
When the value of an asset such as a house increases
How do Private pensions increase distribution of wealth?
Profits and financial assets such as shares and generally forms of marketable wealth pensions are non-marketable wealth
State pensions are a little more than poverty income
How do inheritance gifts and luck influence the distribution of wealth?
Both new wealth and old wealth affect the distribution of wealth increasing inequality
How does wealth taxation versus taxation of income chase the distribution of wealth?
A lot more of the governments income comes from taxation of income rather than taxation of wealth. Wealth is lightly taxed and there are loopholes to get round it. Wealthy can employ accountants to get round tax
What is equity?
When everyone is treated fairly
What is equality?
When everyone is treated the same. A completely equal distribution of income means everyone had the the same income
Can equity be measured?
No because it’s a normative concept
What does government intervention always follow?
The principal of horizontal equity
When does horizontal equity mean?
When households with the Same income and personal circumstances pay the same income tax and are Eligible for the same welfare benefits
Why is vertical equity controversial?
Because it justifies taking income from the rich and giving it to the poor
What is a transfer payment?
Payment of money for which goods and services are not received in exchange
What does achieving vertical equity conflict with?
The principle of intervention(benefit principle)
When is the benefit principle?
Argues that those who benefit from gov spending e.g motorists should pay most taxes for road
What is the Gini coefficient?
Measures the extend to which the distribution of income or wealth among individuals or households within an economy deviates from perfectly equal distribution
What do economists use to measure inequality?
-Lorenz curve
-Gini coefficient
What is the Lorenz curve?
A graph on which cumulative percentage of total national income or wealth is plotted against the cumulative percentage of population (ranked in increasing size of share). The extend to which Thursday curve dips below a straight diagonal line indicates the degree of inequality of distribution
What are the axis of the Lorenz curve
X axis: % of population
Y axis: % of income
If incomes were distributed evenly what would the Lorenz curve look like?
A diagonal line in the diagram
The nearer the Lorenz curve is to the diagonal…
The more even the distribution of income
What does the Gini coefficient measure of the Lorenz curve?
Area between the Lorenz curve the diagonal as a ratio of the total area under the diagonal.
Gini coefficient calculated by Area A/ area A+Area B
The lower the value of the Gini coefficient?
The more equally household income is distributed
What would the Lorenz curve look like if the Gini coefficient was 1?
Right angle triangle
What is the scale for the Gini coefficient
0-1
What do economics in favour of gov intervention argue about more equal distributions or income and wealth?
It can lead to economic growth and the fruits of the faster growth can be used to improve living standards and economic welfare
What is the logic behind the argument that more equal distribution of wealth and income leads to economic growth?
People on low incomes spend their money on consumption and safe little
-increases aggregate demand in the economy which leads to economic growth
People with high incomes spend little on consumption which leads to less economic growth
(Inequality means the talents of people in society are wasted)
What is aggregate demand?
Total demand of goods and services within a particular market
What is progressive taxation?
As income rises a greater proportion of income is taxed
What do pro-free-market economists think of progressive taxation?
Progressive taxation of higher incomes and wealth combined with transfer of tax to less well off (e.g benefits) significantly reduces incentives to work hard amongst the rich and poor
What do extreme-pro-market analysts argue?
To make the poor better off eventually inequality must be increased to incentivise those on benefits to get jobs and those working to work harder -leads to economic growth (would increase poverty in short run’
What is the view on most ppl in the UK about wealth inequality”
Redistribution is needed for moral reasons and to maintain social cohesion in society
What is regressive taxation?
All taxes paid at the same rate
What re the main causes of income inequality in the uk?
- Increasing scale and depth of working poverty
Decline in full-time employment in manufacturing
Decline in trade union membership
- Regressive impact of indirect taxes
- Welfare benefits system has become less generous over time
- Affordable jousting to buy and rent + other cost of living issues
- Wealthy inequality contributes to income inequality
What is a gig economy
A gig economy is a free market system in which temporary positions are common and organizations hire independent workers for short-term commitments
What is the Gini coefficient of the UK 2022?
0.36
What is the median disposable household income in the UK?
£32,349
What is the mean disposable income of the uk?
£39,000
What are welfare benefits capped at inside and outside London
Inside London:£23,000 a year
Outside London:£20,000 a year
What the tax bands in the uk
Personal allowance is to £12,570
£12570-£37,700 20%
£37,000-£125,000 40%
£125,00+ 40%
What is the NMW for an apprentice and U18 April 2023?
£5.28
What is the NMW for an 18-20 April 2023?
£7.49
What is the NMW for 21-22 April 2023
£10.18
What is the NMW for 23+ April 2023
£10.42
What is the VAT rate in the UK?
20%(but 0% on most foods)
diagram for wage differentials (cause of unequal distribution of wealth)?
MRP, inelastic demand curve leads to higher wage
