Distribution of Income and Wealth: Basics

Question 1

What is income?

Answer 1

Money earnt in a period of time

Question 2

What is wealth?

Answer 2

The total value of assets owned

Question 3

The lower the Gini coefficient…

Answer 3

…the more equal the distribution of income

Question 4

A Gini coefficient of 0 means

Answer 4

Everyone earns the same amount of money

Question 5

A Gini coefficient of 1 means

Answer 5

All income in the economy belongs to 1 person

Question 6

The Lorenz curve shows…

Answer 6

The cumulative income in an economy for each percentage of the population

Question 7

If a Lorenz curve shifts to the right, inequality has…

Answer 7

Widened

Question 8

The formula for the Gini coefficient is:

Answer 8

A / A+B

A is the space between the 45° straight line and the Lorenz curve

B is the space underneath the Lorenz curve

Question 9

The economic benefit(s) of inequality are…

Answer 9

1) Encourages education / skills
2) Encourages labour productivity and mobility
3) Encourages entrepreneurship
4) Creates savings for investment

Question 10

The economic cost(s) of inequality are…

Answer 10

1) Reduces overall utility
2) Reduces growth
3) Increases welfare costs

Question 11

The social benefit(s) of inequality are…

Answer 11

A sense of fairness - people who are talented and work hard will be rewarded

Question 12

The social cost(s) of inequality are…

Answer 12

1) Creates a poverty trap

2) Increases crime

Question 13

What is labour mobility?

Answer 13

The willingness of people to move to other locations where there is more demand for labour

Question 14

Why does inequality lead to reduced utility?

Answer 14

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

Question 15

Why does inequality often reduce economic growth?

Answer 15

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.

Question 16

What has the trend in Australia’s Gini coefficient for income been?

Answer 16

Has remained steady around 0.32 for the past 15 years

Question 17

What has the trend in Australia’s Gini coefficient for wealth been?

Answer 17

Has remained steady around 0.61 for the past 15 years

Question 18

List 4 changes over the past 20 years that could have affected income inequality in Australia

Answer 18

1) Fluctuations in GDP growth
2) Trade liberalisation
3) Labour market decentralisation
4) Changes to income tax and welfare

Question 19

List 5 groups that on average earn less than the national average

Answer 19

1) Single parents
2) Women
3) Migrants from non-English speaking backgrounds
4) Low-skilled occupations
5) Young adults

Question 20

Why are women likely to earn lower incomes than men?

Answer 20

1. Choice of industry
2. Opportunity cost of experience
3. Unconscious bias

Question 21

Why does choice of industry result in women earning less on average than men?

Answer 21

Women often choose to work in industries with more flexible hours (such as retail, hospitality and aged care) – and these industries have lower wages

Question 22

Why does opportunity cost of experience result in women earning less on average than men?

Answer 22

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

Question 23

Why does unconscious bias result in women earning less on average than men?

Answer 23

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.

Question 24

Why does income inequality lead to wealth inequality?

Answer 24

Less income means that people accumulate fewer savings and assets over time

Question 25

Why does wealth inequality lead to income inequality?

Answer 25

Those who own assets (such as property or shares) earn additional income from those assets (such as rent or dividends)

Question 26

The two possible causes of wealth inequality are:

Answer 26

1) Increased asset prices

2) Income inequality allowing richer people to accumulate more assets

Question 27

What is progressive tax?

Answer 27

As income rises, the percentage of income paid as tax increases

Question 28

What is proportional tax?

Answer 28

As income rises, the percentage of income paid as tax stays the same

Question 29

What is regressive tax?

Answer 29

As income rises, the percentage of income paid as tax decreases

Question 30

Is income tax progressive, proportional or regressive?

Answer 30

Progressive

Question 31

Is the GST progressive, proportional or regressive?

Answer 31

Regressive

Question 32

Is the petrol excise (tax) progressive, proportional or regressive?

Answer 32

Regressive

Question 33

What is the tax-free threshold?

Answer 33

The amount you can earn before you start paying income tax

Question 34

How would an expansionary monetary policy affect inequality?

Answer 34

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

Question 35

Why do low-skilled occupations earn lower incomes?

Answer 35

There is high supply of people who can do those jobs

Question 36

How does microeconomic reform usually affect inequality?

Answer 36

Widens inequality:
It reduces protection for low-skilled workers or workers in particular industries, while increasing incomes for high-skilled workers and business owners