7.1 The distribution of income and wealth Flashcards
what is the definition of wealth?
wealth is the stock of everything a person household, firm or country owns which has value at a particular point in time.
what is the definition of income?
income is a flow of money going to factors of production e.g. Wages and salaries paid to people from their jobs
what is the definition of distribution of income/wealth?
how income/wealth is divided between different groups in society e.g. rich to poor, male to female
what is the main difference between income and wealth
income is a flow whereas wealth is a stock
what is the link between income and wealth
The wealthier you are the more likely you are to earn investment or unearned income (e.g. rent, returns from bonds) , therefore adding to total income.
what two cycles effects the rich and poor and why?
Rich benefit from virtuous circle; wealth increases income, wealth allows to save, saving adds to wealth.
poor suffer from vicious circle; poor have to borrow, borrowing adds to personal debt, income is spent on debt repayment, consumption and wealth of individual falls.
What 4 factors influence the distribution of income and why?
- Factors of production e.g. salaries and wages haven’t risen as much as dividends from entrepreneurs or rent for land owners
- Unearned vs earned income, unearned income helps to boost wealth
- wage and salary differentials between the top and bottom earners due to the elasticity of demand and supply for unskilled workers and more inelastic demand and supply for skilled workers so wages for high skilled tend to be and stay higher.
- Globalisation and migration of workers, due to lower paid work being outsourced internationally to lower paid workers and competition for low paid work to survive workers may try to low ball employer to convince them to employ them.
what 4 factors influence the distribution of wealth and why?
The ability to benefit from capital gains (value of asset increase), wealthy own the expensive assets which tend to rise e.g. houses while poor tend to own depreciating assets (tv/ cars) or don’t own any assets (renting)
Private pension assets, many low paid workers don’t pay into private pensions which have higher yields (as they cant afford to) and have to rely on state pension just above poverty income
Inheritance, luck of being born into rich family
Wealth tax is low and can be avoided compared to income tax
what is the difference between equity and equality?
equity is where all is treated fairly (normative statement ) and equality is where everyone is treated the exact same e.g. complete equality is where everybody has the same income (positive statement)
How do we measure inequality?
Using the Lorenz curve and Gini coefficient
How do you explain the Lorenz curve? + draw Lorenz curve
the nearer to the Lorenz curve is to the diagonal line of complete equality the more equal the distribution of income is.
what does the Gini coefficient measure and what is the equation for it?
Gini coefficient measures the area between the Lorenz curve and the diagonal as a ration of the total area under the diagonal.
GINI= area A/ area A + area B
the lower the Gini coefficient the more equal
what are the benefits of more equal distribution of income? and what economists think this
interventionist economists would argue
more equal distribution of income can lead to faster growth which can lead to improved living standards and higher economic welfare for the population.
as lower incomes have higher MPC
what are the costs of more equal distribution of income? and what economists think this
pro free market economists would argue that fixing equality would disincentive people to work hard as higher incomes would be taxed more and if welfare benefits were increased it would also disincentive work
