Distribution of Income and Wealth Flashcards
What is Income
Income is a flow concept, flow of money into your ‘account’ or factors of production
What is Wealth
The value of a stock of assets owned by someone or society as a whole
Gini coefficient
Measures the level of inequality in a country through the distribution of income and wealth between the poorest and the richest
How are wealth and income linked
The wealthier you are, the more investment income or unearned income you are likely to earn, which adds to your total income. Some of your income can also add to your wealth.
Where does income come from
Wages and salaries to people in work, state pensions and benefits, profits from businesses, dividends, rental income, interest pay to owners of capital
Where does wealth come from
Savings, ownership of shares, ownership of property, wealth from private pension schemes and life insurance schemes
Factors influencing the distribution of income
Distribution of shares of national income between factors of production, distinction between earned and unearned income, wage and salary differentials, education, globalisation and international migration of workers
Factors influencing distribution of wealth
The value of an asset and ability to benefit from capital gains, private pension assets, inheritance gifts and luck, wealth taxation, age
Equality
When everyone is treated the exact same. A complete equality in the distribution of income is achieved when each person receives the same amount of income.
Equity
When everyone is treated fairly, but differently, taking into account their different circumstances. Very few people would argue that it would be equitable if everyone received the same income, irrespective of their efforts and contributions to society
In favour of equality
Fewer incentives for corruption and illegal activities for financial gain, less use of natural resources, more consumer satisfaction among poorer, inequality hinders growth of human capital because it undermines educational opportunities for disadvantaged individuals which hampers skills developments
In favour of inequality
Growing inequality creates incentives to study, trade, start businesses, These differences help the smooth operation of the price system and lead to an efficient resource allocation, by making rich richer the GDP will grow, more high quality products, more resources
Absolute poverty
Is a condition where household income is below a necessary level to maintain basic living standards
Primary poverty
A situation where income is insufficient to meet basic needs- even if every penny is spent wisely
Secondary poverty
Where money is misspent on luxuries, leaving insufficient amounts to buy necessities
Relative poverty
Household income is a certain percentage below a specified proportion of the average incomes for all households. It classifies individuals as poor by comparing to others in the population
Taxation
Progressive- takes a higher percentage of tax from people with higher incomes
Regressive- as a percentage of income the proportion of tax paid declines at higher income levels which widens the income gap
Transfer Payments / Benefits
A payment made or income received in which no goods or services are being paid for, such as a subsidy. This increases incomes of the poor. However this can lead to an unemployment or poverty trap since they don’t’ want to work and be taxed on that work
Minimum and Maximum wages
Minimum wages can boost wages for lower income groups to help push people out of poverty.
Maximum wages control how much wages can go past a certain level and usually come in the form of bonus capping
Gov. spending on education, training, healthcare
Help to improve productivity by increasing skills leading to a higher MRP. If someone falls sick, they can be treated easily and take less days out of work to keep earning potential and productivity high. But these policies are very expensive and are long term so take time to cause effects.
Benefits of equal distributions (interventionists)
Economists who favour gov intervention believe equal distributions can lead to faster economic growth, the benefits can be used to improve living standards and economic welfare
Costs of equal distributions (free-market economists)
Economists of more pro-free market argue that progressive taxation of higher incomes and wealth combined with transfer of taxed income to the less well-off significantly reduces the incentive to work hard. This reduces economic growth. Inequality must first be increased rather than reduced. By incentivising those already working to work harder and the unwaged welfare benefits claimants to search for jobs, economic growth can be achieved faster
Benefits of unequal distribution
People on low incomes and who possess little wealth generally spend most of their incomes on consumption rather than saving. Increased spending on consumer goods increases aggregate demand in the economy, to promote growth
Costs of unequal distribution
Undoubtedly, widening income and wealth inequalities with increased poverty so the debate is where to draw the line when redistributing income and wealth and which methods should be used to achieve the degree of redistribution desired
Arguments for redistribution
More equal societies lead to healthier societies: lower crime, improved mental and physical health. Promotes a more stable, egalitarian society. Provides for those in need
Arguments against redistribution
Reduced incentives and discourages people from working, saving money, investing, and driving economic growth from the supply side. It is thought to discourage production and wealth creation, harming society as a whole. Decreases healthy competition. Decreases personal freedom
