Distribution of Income and Wealth: Basics Flashcards
What is income?
Money earnt in a period of time
What is wealth?
The total value of assets owned
The lower the Gini coefficient…
…the more equal the distribution of income
A Gini coefficient of 0 means
Everyone earns the same amount of money
A Gini coefficient of 1 means
All income in the economy belongs to 1 person
The Lorenz curve shows…
The cumulative income in an economy for each percentage of the population
If a Lorenz curve shifts to the right, inequality has…
Widened
The formula for the Gini coefficient is:
A / A+B
A is the space between the 45° straight line and the Lorenz curve
B is the space underneath the Lorenz curve
The economic benefit(s) of inequality are…
1) Encourages education / skills
2) Encourages labour productivity and mobility
3) Encourages entrepreneurship
4) Creates savings for investment
The economic cost(s) of inequality are…
1) Reduces overall utility
2) Reduces growth
3) Increases welfare costs
The social benefit(s) of inequality are…
A sense of fairness - people who are talented and work hard will be rewarded
The social cost(s) of inequality are…
1) Creates a poverty trap
2) Increases crime
What is labour mobility?
The willingness of people to move to other locations where there is more demand for labour
Why does inequality lead to reduced utility?
A person with limited wealth will gain more happiness from receiving and spending an extra dollar than someone who already has a lot of wealth
Why does inequality often reduce economic growth?
High-income people have a high APS. So if most income goes to a few high-income people, much of it will be saved and consumption and aggregate demand in the economy will fall.
What has the trend in Australia’s Gini coefficient for income been?
Has remained steady around 0.32 for the past 15 years
What has the trend in Australia’s Gini coefficient for wealth been?
Has remained steady around 0.61 for the past 15 years
List 4 changes over the past 20 years that could have affected income inequality in Australia
1) Fluctuations in GDP growth
2) Trade liberalisation
3) Labour market decentralisation
4) Changes to income tax and welfare
List 5 groups that on average earn less than the national average
1) Single parents
2) Women
3) Migrants from non-English speaking backgrounds
4) Low-skilled occupations
5) Young adults
Why are women likely to earn lower incomes than men?
- Choice of industry
- Opportunity cost of experience
- Unconscious bias
Why does choice of industry result in women earning less on average than men?
Women often choose to work in industries with more flexible hours (such as retail, hospitality and aged care) – and these industries have lower wages
Why does opportunity cost of experience result in women earning less on average than men?
Women who take time off to have and care for children have less experience than men, meaning they are less likely to be promoted later on
Why does unconscious bias result in women earning less on average than men?
Managers often expect that ideal employees will be similar to people they have previously seen doing those jobs, which have traditionally been men. This makes it harder for women to attain those high-paying jobs.
Why does income inequality lead to wealth inequality?
Less income means that people accumulate fewer savings and assets over time
Why does wealth inequality lead to income inequality?
Those who own assets (such as property or shares) earn additional income from those assets (such as rent or dividends)
The two possible causes of wealth inequality are:
1) Increased asset prices
2) Income inequality allowing richer people to accumulate more assets
What is progressive tax?
As income rises, the percentage of income paid as tax increases
What is proportional tax?
As income rises, the percentage of income paid as tax stays the same
What is regressive tax?
As income rises, the percentage of income paid as tax decreases
Is income tax progressive, proportional or regressive?
Progressive
Is the GST progressive, proportional or regressive?
Regressive
Is the petrol excise (tax) progressive, proportional or regressive?
Regressive
What is the tax-free threshold?
The amount you can earn before you start paying income tax
How would an expansionary monetary policy affect inequality?
Mixed effect:
On one hand, it widens wealth inequality because it increases demand for assets (such as property and shares), increasing asset prices, benefitting those who already own assets.
On the other hand, it reduces income inequality because it reduces the interest wealthy people earn on their savings, and decreases the cost of borrowing for those who are poor.
Also, because wealthy people own other assets too, an increase in house prices due to low intertest rates has a bigger proportional impact on middle-wealth people than high-wealth people, slightly reducing the Gini coefficient
Why do low-skilled occupations earn lower incomes?
There is high supply of people who can do those jobs
How does microeconomic reform usually affect inequality?
Widens inequality:
It reduces protection for low-skilled workers or workers in particular industries, while increasing incomes for high-skilled workers and business owners
