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. 1 is one person has all the money and 0 is perfect equality.

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 (owning land rent, salaries etc), distinction between earned and unearned income (like interest or investments), wage and salary differentials, education, globalisation and international migration of workers (more competition, supply of labour)

Question 8

Factors influencing distribution of wealth

Answer 8

The value of an asset and ability to benefit from capital gains (increasing value of a house), 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. 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 13

Absolute poverty

Answer 13

Is a condition where household income is below a necessary level to maintain basic living standards such as food/water

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. Below 60% of median income

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 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

Costs of equal distributions (free-market economists)

Answer 21

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 22

Costs of unequal distribution

Answer 22

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 23

Arguments for redistribution

Answer 23

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 24

Arguments against redistribution

Answer 24

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

Question 25

Distribution of income/wealth

Answer 25

How income/wealth is divided amongst the rich and the poor or between different groups in society

Question 26

Lorenz Curve

Answer 26

A graph on which the cumulative percentage of total national income or wealth is plotted against the cumulative percentage of population. The extent to which the curve dips below a straight diagonal line is the degree of inequality. Gini coefficient is the area A ÷ area A+B. A is above curve and below line while B is below curve

Question 27

Negatives of Poverty

Answer 27

Can create educational deprivation for children, health deprivation as there is higher risk of both illness and premature death, effects on mental health also, low standard of living can be de-moralizing.

Question 28

Fiscal Drag

Answer 28

Occurs in a progressive taxation system when the government fails to raise tax thresholds to keep pace with inflation so people are dragged into higher tax brackets and receiving less real incomes. Can reduce incentive for higher wages and people work less hard, reducing potential growth

Question 29

Poverty trap

Answer 29

When people earn income they lose the right to claim the government benefit scheme, so low-paid workers get caught in a zone where they must pay tax and NIC on the little money earned and lose benefits causing relat8ve poverty as any increase in income will have little effect or reduce real incomes from higher tax brackets

Question 30

Wealth taxation vs taxation of income

Answer 30

In the UK, a much larger fraction of the governments tax revenue comes from taxation of income rather than wealth. Wealth is lightly taxed as there are many loopholes through which the wealthy can legally avoid paying wealth taxes. The wealthy can also afford to employ accountants and financial advisers who minimise the tax they are liable to pay

Question 31

Causes for poverty

Answer 31

Old age leading to relative poverty, unemployment leading to poverty, low wages leading to poverty, Technological advances leading to poverty, A recession, Poor education

Question 32

Old age leading to relative poverty

Answer 32

Many rely on state pension scheme and lack private pensions, in 1980 the pension rise moved away from being index-linked to average earnings to be linked instead to inflation. Pensions no longer rose in line with general increase in the standard of living and pensioner's living standards essentially remain at their 1980 level, making old age pensioners increasingly worse off to those working. Gov introduced triple lock but effects have not been shown

Question 33

Unemployment leading to poverty

Answer 33

Unemployment benefits are generally lower than the pay workers received when working so increased unemployment increases poverty.

Question 34

Low wages and poverty

Answer 34

People can be working jobs but receiving low wages. Includes unskilled workers and skilled workers who have lost jobs in industrial sectors like manufacturing and coal mining which can be because the UK has seen a decline in traditional incomes in the past few years

Question 35

Structural unemployment leading to poverty

Answer 35

UK has experienced a movement away from heavy industry and manufacturing industry towards more service sector industry. Those who used to work in these industries may not have the transferrable skills to take service sector jobs creating unemployment going into poverty from structural unemployment

Question 36

Technological change leading to poverty

Answer 36

Through invention and innovation, new capital goods can be acquired or technological advancements can cause a substitution of human labour for capital such as ai replacing jobs or machines in factories creating products rather than humans. This reduces jobs and raises unemployment as those working may not have transferrable skills

Question 37

Consequences of Wealth Inequality

Answer 37

Unequal distribution of property, people may life in low quality homes. Wealthy may afford better education and healthcare creates societal inequalities. Likely to create child poverty and old age poverty. Impacts income inequality. Generational problems, long term inequality/poverty. Wealthy can afford to take big risks, gives more access to high risk high reward opportunities which can further their wealth.