Distribution of Income

Question 1

Define income inequality

Answer 1

The degree to which Y is unevenly distributed among people in an economy

Question 2

How is income inequality measured?

Answer 2

• Lorenz curve (cumulative % of Y against cumulative % of Y units)
• Gini co-efficient (numerical value for comparing inequality - ratio of area b/w the Lorenz curve and the line of equality - Area A / Area A+B
• b/w 0 and 1 (closer to 1 - more unequal)

Question 3

How is income distributed in Australia?

Answer 3

Highest 20% of household - 6 times the Y of lowest 20%

Question 4

Define wealth. Identify 3 sources of wealth

Answer 4

Value of assets owned at a certain point in time

Sources:

• Property
• Real estate
• Main home

Question 5

Describe the relationship between income and wealth

Answer 5

• High levels of Y - Increase in level of wealth
• Y can be earned from wealth e.g. interest on deposits etc.

Wealth produces Y and Y can be used to accumulate wealth

Question 6

Identify the sources of Income

Answer 6

• Wages from labour
• Rent from land
• Earnings from capital
• Profit from entrepreneurship
• Transfer payments (social security or social welfare)

Question 7

How does age and occupation impact the distribution of income and wealth?

Answer 7

• Y and wealth is at its highest b/w the ages of 35 and 54 - main years of person’s working life
• Those with higher qualifications and experience earn higher Ys and more wealth

Question 8

How does gender and occupation impact the distribution of income and wealth?

Answer 8

Difference in earnings of males and females can be explained by historic human capital factors - women had fewer opps to gain education and skills

• Occupations with a high female population are still generally paid lower wages
• Women have many home caring responsibilities - often work part time > difficult to find high paying part time jobs

Question 9

How does ethnic and cultural background impact the distribution of income and wealth?

Answer 9

• Many migrants (55%) come from non-english speaking backgrounds > Ys are significantly lower - may lack skills etc.
• Education levels, age, and English-speaking proficiency dictate how quickly and successfully new migrants can integrate into the labour market

Question 10

How does family structure impact the distribution of income and wealth?

Answer 10

• 1 person and single-parent households receive weekly Ys significantly below the median of $899 per week
• reflects lower rates of full-time employment and caring responsibilities

Question 11

Identify the economic costs of inequality

Answer 11

Acronym: CRRIP

• Reduction in overall utility (reduces satisfaction in a society)
• Reduction in EG (low Y earners spend a higher proportion of their Y on g/s - higher MPC)
• Conspicuous consumption (more spending by high Y earners on luxuries - can create a society of materialism)
• Poverty and Social problems
• Increases in cost of welfare support

Question 12

Outline the social costs of inequality

Answer 12

• Social class divisions

- Poverty

Question 13

Outline the economic benefits of inequality

Answer 13

Acronym: CEEEM

• Encourages LF to increase skills and education
• Encourages LF to work longer and harder
• Makes LF more mobile (incentive to more where there is higher Y - more efficient allocation of resources)
• Encourages entrepreneurs to accept risks more readily
• Creates potential for higher savings and capital formation

Question 14

Outline the social benefits of inequality

Answer 14

Few overall social benefits as economic system determines that distribution of Y and wealth doesn’t give everyone the same level of opp. to pursue their Y and wealth goals