Distribution of Income and Wealth, Poverty and Inequality

Question 1

Define wealth and income

Answer 1

• Wealth refers to the stock of assets an individual owns, such as cash, property, commodities, bonds etc.
• Income refers to an amount of money an individual receives on a regular basis for carrying out a service, such as a job.

Question 2

Describe the Lorenz curve

Answer 2

• The Lorenz curve graphs population against the cumulative income in an economy, to show the percentages of cumulative income each population group is accountable for.
• Graphical representation of the distribution of income and wealth in an economy.
• A straight lined graph represents perfect equality (Gini coefficient of 1).

Question 3

Describe the Gini coefficient

Answer 3

• The Gini coefficient is a numerical measure of inequality in an economy.
• The value of the Gini coefficient ranges between 0 and 1, with 0 being perfect equality and 1 being complete inequality.

Question 4

Define equity and equality

Answer 4

Equity refers to the idea of fairness, a subjective idea of what is an acceptable distribution of income and wealth in an economy.
Equality refers to equal distribution of income and wealth in an economy, meaning all individuals have the same income/wealth.
-Prioritising equity in an economy will most likely lead to economic inefficiencies.

Question 5

Describe potential causes of inequality

Answer 5

• Owning of assets by richer population
• Differences in skillset/education access
• Welfare payments
• Regressive taxes (VAT)
• Minimum wage may be ineffective (students and part time workers who are generally not poor)
• Increase in the number of people claiming benefits/poverty trap (no incentive for individuals to work therefore no future earning potential)

Question 6

Define relative poverty

Answer 6

-Relative poverty refers to individuals/households living below a specific percentage of the national average income (In the UK, incomes of below 60% of the median are said to be in relative poverty.)

Question 7

Define absolute poverty

Answer 7

Absolute poverty refers to individuals/households not being able to afford basic living necessities.
-A individual/household is unable to meet the needs to water, food, shelter, clothing and education.

Question 8

List potential policies to reduce poverty/inequality

Answer 8

• National minimum wage
• Progressive tax systems
• Inheritance tax
• UBI
• Means tested benefits and non means tested benefits
• Benefits in kind/Supply side policies (Access to education/free training schemes)

Question 9

Describe the NMW as a policy to reduce poverty

Answer 9

The government may implement a national minimum wage to prevent the exploitation of labour as well as increase the incomes of the poorest earners.
-The national min wage is a wage rate that is set above the equilibrium wage rate in an economy.

Question 10

Describe causes of absolute poverty

Answer 10

• War/conflict
• Corruption
• Natural disasters
• Born into poverty
• Agricultural dominance

Question 11

Describe causes of relative poverty

Answer 11

• Unemployment (cyclical/structural)
• Poor education
• Low MRP for low income earners
• Born into poverty (evidence shows children born by single parents leads to lower average future earning potentials)
• Regressive taxation
• Lack of government support (benefits/subsidy )

Question 12

Describe the pros and cons of a national minimum wage

Answer 12

Pros:

• Aims to reduce exploitation of labour/
• Increases the income of poor earners
• Potential increased productivity, higher wages incentivising workers to work harder.
• Incentivises firms to invest in labour as labour costs as a % of total costs are higher, therefore labour productivity is important in the long term.
• Counteract monopsony power

Cons

• Potentially lead to higher prices (cost push inflation) the higher wage cost is pushed onto consumers.
• May cause disequilibrium/excess supply of labour
• Potential exploitation of labour through black markets
• Firms incentivised to not raise wages

Question 13

Describe how taxes can be used as a policy to reduce poverty

Answer 13

• Inheritance tax is a tax payed on money/assets inherited. The tax revenue gained from inheritance tax can be redistributed. Everyone pays inheritance tax regardless of income therefore may be ineffective.
• A progressive tax system is one in which as income increases the amount of tax you pay also increases. As Y increases the average rate of tax paid increases. In theory the tax revenue gained from the higher income earners can be redistributed onto the lower income earners through benefits/gov policies etc. (Laffer curve)
• Reducing indirect taxes/regressive tax systems. A regressive tax system is one in which poorer individuals pay proportionally more as a % of their income. Reducing higher indirect tax may leave disposable income for lower income earners.

Question 14

Describe how benefits of kind can be used as a policy to reduce poverty

Answer 14

• Increasing subsidy on benefits of kind (public services) gives poorer individuals better access to training schemes, education and a sufficient healthcare system.
• Improving the skills of poorer individuals improves their employability (long term AS growth).

Question 15

Describe how means tested benefits can be used as a policy to reduce poverty

Answer 15

• Means tested benefits are benefits paid to individuals who are eligible for these benefits (means test determines income/capital) and aims to pull individuals out of poverty by increasing income.
• Means tested benefits are removed when an individuals living standards rise above a certain level.
• Poverty trap, no incentive to work.

Question 16

Describe how UBI can be used as a policy to reduce poverty

Answer 16

• Universal basic income refers to an amount of money that is paid to every individual in an economy in regular intervals to act as an income floor.
• Reduces poverty by increasing income of poorer individuals whilst also incentivising the start up of a business (Y to fall back on)

Question 17

Describe how non-means tested benefits can be used to reduce poverty

Answer 17

• Non means tested benefits refer to benefits paid which don’t require proof of income but may require other requirements.
• Contributory refers to benefits aimed to replace income in the event an individual is unable to work or is unemployed. (Dependent on NI contributions)
• Non Contributory: these are benefits paid to individuals that may have a disability to help with their additional costs of living (prevents further poverty with individuals who are disabled.)

Question 18

Define horizontal and vertical equity

Answer 18

Horizontal equity refers to the theory that all individuals should contribute the same amount in terms of taxation whereas vertical equity suggests higher income earners should contribute more to taxation compared to low income earners.