Distribution of Income and Wealth

Question 1

What is Income

Answer 1

Income is a flow concept, flow of money into your ‘account’ or factors of production

Question 2

What is Wealth

Answer 2

The value of a stock of assets owned by someone or society as a whole

Question 3

Gini coefficient

Answer 3

Measures the level of inequality in a country through the distribution of income and wealth between the poorest and the richest

Question 4

How are wealth and income linked

Answer 4

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.

Question 5

Where does income come from

Answer 5

Wages and salaries to people in work, state pensions and benefits, profits from businesses, dividends, rental income, interest pay to owners of capital

Question 6

Where does wealth come from

Answer 6

Savings, ownership of shares, ownership of property, wealth from private pension schemes and life insurance schemes

Question 7

Factors influencing the distribution of income

Answer 7

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

Question 8

Factors influencing distribution of wealth

Answer 8

The value of an asset and ability to benefit from capital gains, private pension assets, inheritance gifts and luck, wealth taxation, age

Question 9

Equality

Answer 9

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.

Question 10

Equity

Answer 10

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

Question 11

In favour of equality

Answer 11

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

Question 12

In favour of inequality

Answer 12

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

Question 13

Absolute poverty

Answer 13

Is a condition where household income is below a necessary level to maintain basic living standards

Question 14

Primary poverty

Answer 14

A situation where income is insufficient to meet basic needs- even if every penny is spent wisely

Question 15

Secondary poverty

Answer 15

Where money is misspent on luxuries, leaving insufficient amounts to buy necessities

Question 16

Relative poverty

Answer 16

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

Question 17

Taxation

Answer 17

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

Question 18

Transfer Payments / Benefits

Answer 18

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

Question 19

Minimum and Maximum wages

Answer 19

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

Question 20

Gov. spending on education, training, healthcare

Answer 20

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.

Question 21

Benefits of equal distributions (interventionists)

Answer 21

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

Question 22

Costs of equal distributions (free-market economists)

Answer 22

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

Question 23

Benefits of unequal distribution

Answer 23

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

Question 24

Costs of unequal distribution

Answer 24

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

Question 25

Arguments for redistribution

Answer 25

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

Question 26

Arguments against redistribution

Answer 26

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