Distribution of Income and Wealth

Question 1

How is income inequality measured?

Answer 1

Lorenz Curve: Cumulative percentage of income against the cumulative percentage of income units

Question 2

What is the Gini Co-efficient

Answer 2

Numerical value of comparing inequality

Is the ratio of the area between the Lorenz curve and the 45-degree line to the whole area below the 45-degree line

Question 3

Define income

Answer 3

Is the amount that is received in a given period of time. It is the flow of funds

Question 4

Define wealth

Answer 4

Wealth is the value of the things a person owns at a point in time. It is a stock of assets

Wealth distribution shows greater inequality

Question 5

What is the relationship between income and wealth

Answer 5

• High levels of income allow a person to increase their level of wealth.
• Income is also earned from wealth
• Wealth produces income and income can be used to accumulate wealth

Question 6

What are the economic costs of income inequality

Answer 6

Reduces overall utility 
Reduce EG 
Creates conspicuous consumption
Creates poverty & social problems
Increases cost of welfare support

Question 7

What are the economic benefits of income inequality

Answer 7

Encourages labour force to increase education & skils
Encourages the labour force to work longer & harder
Makes labour force more mobile
Encourages entrepreneurs to accept risks
Creates the potential for higher savings and capital formation

Question 8

What are the social costs of income inequality

Answer 8

Social class divisions 
Poverty

Question 9

What are the social benefits of income inequality

Answer 9

Could produce a “larger pie” from which all members of society could benefit

Question 10

What effect to Govt. policies have

Answer 10

Direct Benefits: Pensions, family allowances
Indirect Benefits: non-cash benefits
Direct tax system is progressive
Indirect tax system is regressive

Question 11

What impact does the fiscal policy have on income distribution

Answer 11

Fiscal restraints: cut back on govt. expenditure
Tax Reform: GST
Company Tax: 27.5%, Over 100 Million is 30%
Privatisation

Question 12

Impact of labour markets policies on income distribution

Answer 12

Industrial Relations Reform: Increased income inequality
Women and lowly skilled suffered most
The growth in part-time jobs
More than 1.8M are on minimum wage

Question 13

What is the impact of the monetary policy on income distribution

Answer 13

Low-interest rates encourage growth and lower U/E, they also reduce earnings from savings: Problem for retirees