Chapter 7

Question 1

Define distribution of income

Answer 1

How income is divided between rich and poor

Question 2

Define distribution of wealth

Answer 2

How wealth is divided between rich and poor

Question 3

Difference between income and wealth

Answer 3

Income- Personal or household flow of money received in a particular period of time

Wealth- Personal wealth is the stock of everything that a person or household owns at a particular point in time which has value

Question 4

Time difference of wealth and income

Answer 4

Income- Flow in a period

Wealth- Stock

Question 5

Example of income and wealth

Answer 5

Income- Hourly rate for example

Wealth- Household for example

Question 6

Why the rich get richer

Answer 6

Wealth increases income, allowing wealthy to save, saving adds to wealth and so on

Question 7

Why the poor get poorer

Answer 7

Low income means borrowing, borrowing adds to personal debt, income is spent on debt repay and wealth disappears

Question 8

Factors that influence the distribution of income

Answer 8

• Factors of production (large land gain more money)
• Unearned (interest and investment) and earned income
• Wage and salary differences
• Globalisation and international migration of workers (low paid workers in competition)

Question 9

% of adults with no or negative wealth

Answer 9

15%

Question 10

Factors affecting distribution of wealth

Answer 10

• Ability to benefit from capital gain (value of homes increasing for eg)
• Private pension assets
• Inheritance, gift, luck
• Wealth taxation is much lower than income taxation

Question 11

Difference between equity and equality

Answer 11

Equity: when everyone is treated fairly
Equality: when everyone is treated the same

Question 12

Can equality and equity he measure

Answer 12

Equality- can

Equity- cannot (normative concept)

Question 13

How can we measure distribution of income and see if it is equal or not

Answer 13

Through Lorenz Curve and Gini coefficient

Question 14

Difference between lorenz curve and gini coefficient

Answer 14

Lorenz curve is a graph to show how far distributed is from the line of complete equality
Gini coefficient measures the extent to which distribution of income within an economy deviates from perfect equal distribution

Question 15

Draw the Lorenz curve

Answer 15

…

Question 16

What is the gini coefficient equation

Answer 16

Area A (Between line of equality and lorenz curve) 
Area B (outside of lorenz curve) 

Area A/ (Area A+ Area B)

Question 17

What does a low value of gini coefficient show

Answer 17

more equal household distribution

Question 18

Why would equal distribution of income cause economic growth

Answer 18

Because those wealthy save a lot so are not injecting into the economy

Question 19

What is the pro-free market economists view of wealth and income should be equal

Answer 19

• No account of incentives
• Gov progressive taxation makes people want to work less
• Inequality causes people to want to work more

Question 20

Define poverty

Answer 20

Not having enough money or income to meet basic need including food, clothing and shelter

Question 21

Difference between absolute and relative poverty

Answer 21

absolute: severe deprivation of basic human needs
relative: when income is below average income (60% below)

Question 22

Causes of poverty

Answer 22

• Old age (relying on state pension)
• Unemployment
• Low wages

Question 23

Effects of poverty on the UK

Answer 23

• Educational deprivation
• Health deprivation
• Children in poverty are 2x more likely to live in bad housing

Question 24

Ways of reducing poverty in the UK

Answer 24

• taxation

- benefits system

Question 25

Define fiscal drag

Answer 25

In progressive income tax system when government fails to raise tax threshold to keep pace with inflation
(Inflation dragging those previously not, into taxation)

Question 26

Define marginal tax rate

Answer 26

Tax rate levied on the last pound of income received

Question 27

What is the unemployment trap

Answer 27

Having to pay off all money so no point in working