Distribution of Income and Wealth Flashcards
Define Income
The flow of money a person or household receives ina particular time period
Define Wealth
The stock of everything which has value that a person or household owns at a particular point in time
Name 4 factors influencing the distribution of income
Factors of production
The distinction between earned and unearned income
Wage and Salary differentials
Globalisation and the international migration of workers
How do the factors of production influence the distribution of income
How national income is distributed between the different factors of production
ie. the share of national income of landlords/owners of capital has grown, but labour’s share has fallen
Profits and entrepreneurial incomes have risen at the expense of wages/salaries
What is earned income
Wages
Salaries
Self employment income
What is unearned income
How does this influence the distribution of income
Income derived from sources other than employment
Interest/investment income
Usually the inequalies in distribution of wealth depend mostly on the difference in unearned income from high income and low income earners
What causes wage and salary differentials
Caused by
Differences in labour productivity
Elasticity of supply of labour in that market (Affected by ie. longer training periods)
How has globalisation and the international migration of workers influenced the distribution of income
- Low paid workers are in competition with overseas based workers due to outsourcing and migrants.
- Outsourcing allows for firms to pay lower wages in other countries, forcing down wages in the UK
- But for higher paying jobs, executives can force up their wage by saying it must match the rate for the job in other rich countries, if not then they can threaten to leave
Name 4 factors affecting the distribution of wealth
- Ablity to benefit from capital gains
- Private pension assets
- Inheritance, gifts and luck
- Weath taxation vs Income taxation
How does the ability to benefit from capital gains influence the distribution of wealth
- Most consumer durable goods depreciate in value over years after they are purchaed
- But the value of land/property/shares generally increases
- It’s mostly the wealthy that own the most shares/property that end up increassing
How do private pension assets influence the distribution of wealth
- Only recently were in house pension schemes made available to UK workers.
- So low paid workers expected to rely on state pension
What is New Wealth
- Wealth created by entrenprenuers who have built up large personal fortunes, often starting from scratch
- Can create old wealth
What is old wealth
- People who inherit wealth through the luck of having been born into rich families
- Can create new wealth
How does the difference between wealth and income taxation influence the distribution of income
Government collects much more income tax than tax on wealth
Many loopholes to avoid paying wealth taxes
The wealthy can employ accountants/advisors to find these loopholes
How are the richest and poorest places in Northern Europe spread
Richest place - Central London
9 of the poorest places are in the UK aswell
Compare the % of wealth and average income of the top and bottom 10% of the UK
Bottom 10% - £5000 0.5% of wealth
Top 10% - £110,000 45% of wealth
What are the 3 main causes of inequality in the UK stated by Simon Tilford - Deputy director of the CER
Lack of skills
Centralisation of power in London
Issues with infrastructure/affordable housing
How does the UK compare to the EU15 Average GDP per Capita
Only London and South East are above
73% of the UK are below the average
How has the billionare class wealth increased over the last 20 years
2000 - Less than $1 Trillion
2017 - $7.67 Trillion
2019 - $9.1 Trillion
What is the Lorenz Curve
A graph on which the cumulative percentage of total national income/wealth is plotted against the cumulative percentage of population
The extent to which the curve dips below a straight diagonal line indicates the degree of inequality in distribution
What is the Gini Coefficient
Measures the extent to which the distribution of income or wealth among individuals or households within an economy deviates from a perfectly equal distribution
Explain 4 costs of an equitable distribution of income
- Less incentive
- People less encouraged to do training/ work harder to earn a higher income as income won’t be higher
- Less labour Mobility
- Higher wages are usually what attract workers - More labour shortages
- Less saving
- Mainly those on higher incomes with a higher MPS
- Hurts capital formation
- The inequitable distribution creates more capital which increase labour productivity and total output
Explain 4 Benefits of an equitable Distribution of Income
- Less reliance on gov. welfare payments over time
- There will be a detraction from the cycle of poverty
- Increased AD
- Lower income earners have a higher MPC than higher income earners. If everyone is earning the same, overall more will be spent
- Less poverty/ resulting societal problems
- Less problems of disadvantage and poverty that stop people working at their full capacity
- More holistic/equitable society
- Peoples consumption decisions aren’t a reflection of status
Define Poverty
The state of being extremely poor and not having enough money or income to meet basic needs
What is absolute poverty
A condition characterised by severe deprivation of basic human needs.
Depends not only on income but also on access to services
What is relative poverty
Occurs when income is below a specified proportion of average
Name 3 causes of poverty in the UK
Old age
Unemployment
Low wages
How has old age caused poverty
Until the early 1980s, state pension rose with average earnings. But they were then changed to be linked to the rate of inflation, so old people started becoming more worse off.
Unless supplemented by other income, state pension is basically a poverty income
How has unemployment caused poverty
Unemployment benefits are generally lower than in work pay
Though fast, sustained economic growth creating jobs will reduce it
Economic growth can allow governments to spend more on benefits etc.
What are low waged workers
Workers with jobs where their hourly/weekly earnings are low
May be unskilled or skilled workers who have been structurally unemployed so had to accept jobs in unskilled jobs
Usually relatively poor
Who are the unwaged poor
The poor who have no income
Some are absolutely poor
eg. the homeless
What are the 3 effects of poverty in the UK
Educational Deprivation
Health Deprivation
Effect on communities
Explain the affect of poverty on education
The CAPG argues that children from poorer backgrounds lag at all stages of education
Those on free school meals achieve 1.7 grades lower at GCSE and 3 terms behind peers in yr7
Explain the affect of poverty on health
Children born in poorest areas weigh on average 200g less and more likely to die at birth or in infancy.
Professionals on average live 8 years longer
What is the effect of poverty on communities
Twice as likely to live in bad housing, miss out on activities such as school trips, holidays, going out and may have to make a choice between food and heating.
Elderly taking up beds in hospitals after treatment as they simply have no where else to go
What are the 5 stages through which taxes and benefits affect the distribution of income
- Household start with original income
- Income from jobs/private pensions/investments
- Recieve income from cash benefits
- Cash benefits + original income = Gross income
- Then pay direct taxes
- Money left from gross income after direct taxes is disposable income
- Then pay indirect taxes on spending
- Disposable income - indirect taxes is post-tax income
- Households receive benefit from services provided by the government
- Post tax income + these benefits = Final income
What is the poverty trap
When people are no better off following a pay increase because tax being paid increases and benefits are withdrawn
What is fiscal drag and its affect
When inflation/earnings growth pushes people into the next tax band
Reduces/limits increase in AD so is mild deflationary policy and an automatic stabiliser
What is the poverty line in the UK
UK level of absolute poverty
£195 a week for a lone parent with 2 children
What is the unemployment trap
A situation in which there is no incentive for someone who is unemployed to start working because the combined loss of benefits and need to pay income tax would result in them being worse off
What is situational poverty
When a person falls below the poverty line due to a sudden event
What would be the affects of a government employing progressive taxes
Reduce inequality
Allow government to reduce regressive taxes
Could hurt incentives
Give an example showing the relationship between economic growth and poverty
China’s rapid economic growth between 1985 and 2001 helped 450 million people be lifted out of poverty. .
Describe the progressive tax system of Scandinavia and the US
US - Progressive but doesn’t effectively redistribute income
Scand. - Less progressive, gov. gets more revenue which they redistribute effectively
How do developing countries try to tackle poverty
Give an example
Improve human capital through improving education
Trying to stimulate growth/employment by diversifying economy
Sir Lanka trying to develop tourism industry
