Economics of Inequality and Poverty

Question 1

What is equity?

Answer 1

Based on the view that income inequalities are needed to create economic incentives for people to study and work harder. It involves economic fairness or justified inequalities.

• EXAMPLE: people with better qualifications + skills are given better pay than others without these qualities.

Question 2

What is equality?

Answer 2

Equal distribution of income in the economy, thus minimizing or eliminating the income gap between rich and poor.

Question 3

Describe the relationship between equity and equality.

Answer 3

• Economies have unequal distribution of income (received by owners of FOP) and wealth (money, assets, things of value people own e.g savings) because of natural unequal ownership of factors of prod. in the free market economy.

Question 4

Why do governments place policies to reduce income inequalities?

Answer 4

There is a widely shared belief around the world that highly unequal distributions of income = unfair.

Question 5

3 main ways of gov. intervention to promote equity are?

Answer 5

1. taxation policy
2. government expenditure (through direct provision or through subsidies)
3. use of transfer payments

Question 6

What is economic inequality?

Answer 6

Refers to the degree that people in a population differ in their ability to satisfy their economic needs.
- EXAMPLE: inequality in living conditions that arise due to monetary factors, income & wealth, health, nutrition, gender
- Economists usually focus on inequalities that occur from differences in income and wealth.

Question 7

Define and explain unequal distribution of income.

Answer 7

1. Exists when there are imbalances of income distributions, with very few members of the society enjoying a high concentration of the nation’s income, compared to the larger proportion of society earning a relatively small % of the total income.
2. EXAMPLE: Members of a household contribute in different proportions based on their own level of income. Likely to be inequality within a family because each earns different wages and salaries.

Question 8

Income consists of…

Answer 8

1. money people receive from their employment
2. interest from savings accounts
3. holding of bonds
4. dividends from shares
5. rents from properties owned and rented out
6. pensions
7. gov. benefits

Question 9

What measures do economists use to measure income inequality?

Answer 9

GDP per capita, GDP in terms of PPP (purchasing power parity)

Question 10

Define and explain unequal distribution of wealth (wealth gap)

Answer 10

1. Refers to imbalances in the spread of a country’s wealth among its citizens.
2. Few members of a society account for a disproportionately large proportion of the wealth in the country.

Question 11

Link between income and wealth

Answer 11

1. Easier for higher income households to accumulate a greater stock of wealth through savings + investment funds.
2. Higher-level of wealth - large income from their assets & investments.
3. Low-income households likely to incur debts (neg. wealth) reducing their income as they have to pay interest.

Question 12

What factors lead to differences in wealth between countries?

Answer 12

1. Economic factors - High national debt + high international loans are why countries have different levels of wealth.

• EXAMPLE = Countries such as Gambia and Yemen have a high GDP to debt ratio of over 100%. Japan + singapore (high-income countries) have similar level of debts but these are affordable.

2. Natural resources - Countries with abundant natural resources, such as oil, minerals, agricultural land, may have an advantage in terms of wealth generation and economic prosperity. They can trade these resources to garner wealth = high net wealth per person.

• EXAMPLE = Qatar and Kuwait for oil

3. Environmental factors - Natural disasters, climate change, and other environmental factors can impact a country’s ability to generate wealth.

• EXAMPLE = Bangladesh and Mauritania face problems like flood, draughts or extreme temps. This decreases resource productivity + discourages investors. Wealth per capita declines.

4. Physical factors - Location, geography, and access to transportation can impact a country’s ability to engage in trade and generate wealth.

• EXAMPLE = Places with hot + dry climates that are not able to prod. sufficient agriculture to achieve wealth + prosperity.

5. Social factors - Differences in education, health, and social mobility can contribute to wealth disparities between countries.
6. Political factors - Differences in government stability, corruption, and policies can impact a country’s ability to generate wealth. Pol instability caused by civil war, corrup can reduce domestic activity + int trade.

Question 13

What are the measures of income inequality?

Answer 13

1. Can be measured by relative share of national income earned by given percentages of the population.

• Deciles refer to statistical method of splitting data into 10ths, each part accounting for 10% of the pop.
• Quintiles divide statistical data set into fifths, each part representing 20% of the pop.
• These two methods used to measure degree of inequality in a country via lorenz curve + gini coeff

Question 14

What is the Lorenz Curve?

Answer 14

A graphical representation of the income inequality that exists between households in an economy.

• Shows the overall proportion of overall income or wealth accounted for each quintile or decile of the population.

Question 15

Explain the rules of the Lorenz Curve.

Answer 15

The closer a lorenz curve to the diagonal representing perfect income equality, the greater the equality in income distribution.

Question 16

How to draw a Lorenz Curve?

Answer 16

1. Draw a square box
2. Vertical axis measures cumulative percentages of income ranging from 0 to 100%
3. Horizontal axis measures cumulative percentage of population ranging from 0 to 100%
4. Cumulative means 20 represents the poorest 20% of the population, 40 represents the poorest 40%…
5. Diagonal line = perfect equality representing if incomes were equally distributed e.g 20% of pop. receives 20% of income
6. LC demonstrates actual relationship btw % of pop and share of income

Question 17

What is the Gini coefficient?

Answer 17

• Statistical tool to measure the income or wealth inequality calculating a numerical value of a country’s Lorenz Curve
• Value of the GC ranges from 0 (complete equality) to 1 (total inequality)
• Higher gini coefficient means greater income or wealth inequality
• Perfect equality (line of 45 degrees) is not the goal (20 % of the population gets 20% of the income; 40% gets 40% percent of the income etc.)
• That would equate to socialism and completely remove incentives for work as everyone would be paid equally

Question 18

How is Gini coefficient calculated?

Answer 18

Calculated by ratio of the area under the Lorenz Curve to the area under the 45 deg line.

• A/A+B

Question 19

Definition of poverty

Answer 19

Condition of an individual, household, community or country being extremely poor - not having enough money to meet basic human needs e.g food, clothing, shelter, healthcare, education.

Question 20

Difference between absolute and relative poverty

Answer 20

• ABSOLUTE POVERTY: refers to those who are unable to access the basic human needs necessary for survival such as food, clean water, health care, shelter, primary education and information.
• In 2022, the World Bank defined absolute poverty as anyone who was living on less than $1.90 a day (the so called international poverty line)
• Absolute poverty is more prevalent in developing countries than in developed ones
• RELATIVE POVERTY: refers to incomes and hence, consumption levels below the social norm within a country - it is a comparative measure therefore will differ from country to country
• Poverty in a household is considered relative to income levels in other households
• Households that are living with less than 50% of the median household income are considered to be in relative poverty
• Relative poverty is the main form of poverty that occurs in developed countries

Question 21

Consequences of relative and absolute poverty on people and society

Answer 21

1. low living standards
2. lack of access to healthcare and education
3. conflict and war
4. hinders the ability for the government to achieve other macroeconomic objectives such as economic growth and unemployment
5. poverty trap

Question 22

Two single indicators of measuring poverty

Answer 22

1. International poverty lines
2. Minimum income standards

Question 23

What are international poverty lines?

Answer 23

• Minimum threshold level of income that a person in a given country must earn or have access in order to meet the basic needs for survival
• Below the PL, people = in poverty
• The World Bank’s IPL is anyone living on less than $1.90 a day

Question 24

Evaluate IPL (pros and cons of measuring using IPL)

Answer 24

CONS:
- does not take into account of access to sanitation, water, electricity and the effect of such access on the quality of life of people

• food requirements differ as they are linked to energy requirements
• required food calorie will depend on physical attributes such as age, gender, weight, lifestyle
• in more econ developed regions, a higher poverty line is required due to the higher costs of living
• according to WB, to calc the IPL, a measure of NPL is required
• since different countries have diff ways to define poverty, its impractical to collect NPL data to find a average to calc IPL (to overcome this, the WB has employed consultants to study NPL of poor countries using PPP to ensure price of goods and services = standardized.

Question 25

What is the Minimum Income Standard?

Answer 25

Research method that determines the lowest amount of income needed for what members of the public think is an acceptable standard of living in the country.

Question 26

What information does MIS reveal?

Answer 26

• The number of people living below the minimum income required to buy essentials
• The relative contribution of each item in the basket to household’s abilities to achieve MIS
• How these change over time.

Question 27

Where is the MIS used? Specify one country.

Answer 27

1. Japan, UK, Austria, Portugal
2. In the UK, MIS is used to measure 3 things:

• to calculate the minimum living wage: employers must pay 10.75 pounds for those working in London, 9.30 for those outside London.
• act as a quantitive benchmark for NGOs + charities to determine a point of reference when helping people in need, including homeless.
• to calculate the costs of bearing + raising a child. this helps gov determine a level of social security + transfer payments AKA child allowances.

Question 28

Name a composite indicator of measuring poverty.

Answer 28

Multi-dimensional Poverty Index (MPI), which was developed in 2010 by the UNDP, Oxford Poverty + Human development initiative

Question 29

Explain what MPI is.

Answer 29

• The MPI uses a survey to measure the complexities of poor people’s lives, individually and collectively, each year
• The MPI tracks deprivation across three dimensions and 10 indicators:
• Health (child mortality, nutrition)
• Education (years of schooling, enrolment)
• Living standards (water, sanitation, electricity, cooking fuel, housing, assets)
• The survey first identifies which of these 10 deprivations each household experiences
• Households are then categorised as poor if they suffer deprivations across 1/3 or more of the weighted indicators
• The MPI can focus in on regions, ethnicities and also any of the three dimensions
• This adaptability makes it a useful tool for policymakers and non-government organisation (NGOs) working to reduce poverty

Question 30

What are the difficulties in measuring poverty?

Answer 30

• Poverty is multi-dimensional concept and difficult to quantify

1. Poverty has different meanings and different approaches to measurement. This includes difference between relative and absolute poverty. Plus, poverty measured on the basis of income, poverty measured on the basis of deprivations in a no. of different non-monetary areas, known as multidimen. poverty.

• Poverty is usually measured through self reported surveys and this gives rise to multiple discrepancies in - and between - countries

1. Households who identify as poor may exhibit very different characteristics from each other
2. Urban households may have very different ideas of their poverty level compared to rural households
3. Urban areas tend to have higher immigrant households whose status can change relatively quickly as they seize opportunities
4. Rural households may remain in long-term poverty
5. Poverty data for different ages, gender and disabilities is not easily available
6. Relative poverty is highly subjective

• Overestimation or underestimation of the national poverty line

1. Depending on particular goals of governments, the national poverty line for absolute poverty is over/underestimated.
2. Overestimation = larger proportion of a population whose income falls below this line. Used by govs to argue in favor of recieving more foreign aid/multilateral assistance.
3. Underestimation = smaller proportion of a population with an income below this minimum. This can be used by govs formulating national strategies for pov. reduction if they would like to spend less on pov reduction than other activities that require gov funding.

Question 31

Causes of economic inequality and poverty

Answer 31

1. Differences in human capital

• Human capital refers to the stock or accumulation of skills, knowledge and experiences possessed by individuals or the workforce in a country.
• The higher the skill level the higher the level of income
• A country with a poor education system will see greater inequality than one with a good education system
• investing in human capital will shift LRAS 1 to LRAS 2, increasing national income from Yf1 to Yf2.

2. Inequality of opportunity

• Access to education and health can vary significantly within communities and between different regions
• Inequality in education and healthcare leads to inequality of opportunity in the job market

3. Different levels of resource ownership

• Assets generate income
• The more equal the asset ownership in an economy the less the inequality in income distribution

4. Discrimination

• Gender, race - or any other discrimination increases income inequality in an economy

5. Unequal status and power

• Countries with strong trade union membership provide workers with more power and higher levels of income
• With low trade union membership, the exploitation of workers through low wages is easier and income inequality is worse

6. Government tax and benefits policies

• Countries that provide a range of benefits (such as unemployment, pension, disability, child support, housing support etc) raise the income of the lowest 20% of the population resulting in more equal distribution
• Progressive tax systems (a system that applies higher levels of income tax to higher levels of income) allow all income earners to contribute to public revenue according to their ability
• Decreasing taxes on the lower end and increasing it on the upper end would mean that the system is more progressive and there would be a more equal distribution of income

7. Globalisation and technological change

• Globalisation is the economic integration of different countries through increasing freedoms in the cross-border movement of people, goods/services, technology and finance
• This integration of global economies has impacted national cultures, spread ideas, speeded up industrialisation in developing nations and led to de-industrialisation in developed nations
• Countries which are more isolated will experience higher levels of wealth and income inequality

8.Market based supply-side policies

• Supply-side policies such as deregulation, privatisation trade liberalisation, anti-monopoly regulation can provide great opportunities but also increase inequality
• E.g. Privatisation of state owned assets often allows a few people to get rich (those who buy the asset) and the service provided by the newly privatised firm may become more expensive to access

Question 32

The impact of income and wealth inequality on economic growth

Answer 32

• At some point, increasing levels of inequality becomes a disincentive for workers to work and be productive
• This means that some resources (labour) in the economy are not being used efficiently. National output falls and economic growth slows
• Government unemployment payments and welfare benefits may increase
• Government tax revenues may decrease with increasing inequality

Question 33

The impact of income and wealth inequality on standards of living

Answer 33

• If the inequality gap grows, the rich get richer and the poor, relatively poorer
• Over time, this will reduce the standard of living
• The wealthier will access better education and healthcare creating even less opportunity for poorer households in the future

Question 34

The impact of income and wealth inequality on social stability

Answer 34

• More equal societies tend to be more stable, tolerant and considerate with lower levels of crime and better standards of living
• Less equal societies tend to be characterised by political instability, strife, social unrest - and in extreme cases this can lead to revolutions

Question 35

What is the role of taxation in promoting (or worsening) equity (income distribution)?

Answer 35

• Taxes are the most important source of gov. revenue used for public goods, transfer payments, merit goods, correcting externalities, providing subsidies, changing allocation of resources, changing distribution of income…
• Taxation can lower income inequality by taking more taxes from the rich than from the poor

Question 36

Types of taxes

Answer 36

• Direct taxes are taxes imposed on income and profits. They are paid directly to the government by the individual or firm.

1. Personal income taxes - most important source of gov. tax revs in especially developed countries. Paid on all forms of income: (wages, rental income, interest income and dividends)
2. Corporate income taxes - Taxes on profit of corporations
3. Wealth taxes - taxes on the ownership of assets. Two common wealth taxes = property tax (based on value of prop), inheritance tax (based on value of prop inherited).

• Indirect taxes are imposed on spending.
  The less a consumer spends the less indirect tax they pay.

1. General expenditure taxes, also known as sales taxes. Fixed % of the retail price of goods and services. In Europe, this is known as VAT. VAT differs from a sales in that it is a tax paid on the value added by each producer in the prod process. Many countries that use VAT, exempt certain goods and services from tax e.g food, pharmaceuticals, rent on housing - USA. Sometimes different types of g + s have different rates for equity.
2. Excise taxes - taxes paid on specific goods and services, such as cigarettes and petrol.
3. Customs duties, also known as tariffs - type of tax applied on imports of foreign goods into a country.

Question 37

Two reasons why governments levy tariffs.

Answer 37

1. To keep imports out of the country by making them more expensive to consumers.
2. Raise tax revenues.

Question 38

What are the different tax systems?

Answer 38

• Tax systems can be classified as progressive, regressive or proportional
• Most countries have a mix of progressive (direct taxation) and regressive (indirect taxation) taxes in place
• Proportional taxation: as income increases, the fraction of income paid as taxes remain constant; constant tax rate.
• Progressive taxation: as income increases, the fraction of income paid as taxes increases; increasing tax rate.
• Regressive taxation: as income increases, the fraction of income paid as taxes decreases; there is a decreasing tax rate.

Question 39

Progressive Tax System

Answer 39

• The more progressive a tax system, the more equal the after-tax distribution of income becomes
• There is mildly + strongly progressive taxation
• E.g in a progressive tax system, when income increases to 20 000 and then to 30 000, the amount of tax paid increases more
• By shrinking the difference between the high and low income levels, progressive taxation achieves more equal distribution than prop taxation

Question 40

Regressive Tax System

Answer 40

• Regressive taxation, the tax rate decreases as income increases, proportion of income paid in tax falls as income rises, regressive taxation makes income distribution less equal.

Question 41

Why indirect taxes are regressive?

Answer 41

As income increases, the fraction of income paid on the indirect decreases.

• Some goods and services that are necessities are exempt from taxation which makes indirect tax less reg but reg overall.

Question 42

Direct taxes are…

Answer 42

progressive

Question 43

Corporate taxes are…

Answer 43

are usually proportional

Question 44

List the policies to reduce inequalities of opportunities/ investment in human capital

Answer 44

• Transfer payments
• Targeted gov spending on goods and services
• Universal basic income
• Gov intervention in markets: minimum wages and price controls

Question 45

What are transfer payments?

Answer 45

Payments made by the government to individuals specifically for the purpose of redistributing income away from certain groups and toward other groups; they transfer income from those who work + pay taxes to those who need assistance.

• No corresponding output or economic activity for such payments

Question 46

Examples of transfer payments

Answer 46

Unemployment benefits, disability allowances, subsidies to economic producers, student loans on favorable terms, pension payments for retired elderly people, war veterans’ benefits = REFERRED TO AS VULNERABLE GROUPS

Question 47

How do transfer payments reduce inequality of opportunity?

Answer 47

• play a major role in improving income distribution
• in developed countries they contribute an estimated 75% improved distribution
• major antipoverty tool

Question 48

Drawbacks of transfer payments

Answer 48

• Gov expenditure of transfer payments is costly and can drain their limited budgets
• Austerity measures following 2008 financial crisis caused severe econ problems even for high income countries like Portugal, Ireland, Greece…
• Cause laziness among the workforce + overreliance on gov bailouts
• sacrificed alternative gov spending (opp cost)
• Opp costs in the direct provision of goods and services aimed at redistributing wealth + income
• Subsidies for e.g cause overeliance on funding, hindering economic inefficiency, innovation
• low-income and middle-income countries struggle to raise sufficient tax revenues to fund the necessary amt of transfer payments to improve economic opportunities

Question 49

What is targeted gov spending on goods and services?

Answer 49

Governments spend to provide merit goods, which are goods that are beneficial for consumers, often w positive consumption externalities

• merit goods = underproduced + underconsumed in the absence of gov intervention in the free market

Question 50

Two important merit goods that need to be present adequately in the economy.

Answer 50

Education and healthcare - fundamental human rights

Question 51

What do govs need to do to increase the accessibility of healthcare and education?

Answer 51

• It is not enough just to provide education + healthcare
• They must ensure that these are affordable for very low income groups
• Accomplished when govs offer eduation + healthcare that are free or nearly free of charge to consumers
• subsidies may be provided to increase supply
• education + health can be made affordable thru transfer payments

Question 52

Other important merit goods (especially important in developing countries)

Answer 52

• infrastructure, consists of numerous kinds of physical capital e.g clean water supplies, sanitation, sewage
• offering these at zero/low prices make them affordable for poor people who cannot pay for them

Question 53

How do governments provide merit goods?

Answer 53

• Use tax revenues to provide the good in large quantities than the market would have provided to make it available at low prices = increasing redistribution
• provision of merit goods corrects +ve externalities of consumption (market failure)

Question 54

Drawback of provisioning merit goods

Answer 54

Burden on gov budget + has opp costs in terms of foregone alternatives

Question 55

What is Universal Basic Income (UBI)?

Answer 55

• a method intended to provide residents in a country with a sum of money that they would receive regardless of any other income they may have.
• based on the principle that everyone in a society is entitled to a basic income, regardless of whether they work for it/circumstances they have been born into
• popular idea now due to growing inequalities + fear new technology will risk job losses causing more poverty

Question 56

What are supporters of UBI saying?

Answer 56

• It will be effective in reducing poverty
• Admin wise, simple to carry out
• Support diverse groups like students in university, young couples looking to start families, unpaid care workers, budding entrepreneurs w no income
• Provide a better balance btw workers and employers by giving workers more freedom to leave jobs they are unhappy with
• stabilize the economy during a recession by providing income to the unemployed (like auto stabilizer)

Question 57

What are opponents of UBI saying?

Answer 57

• Too expensive = all households including middle + high-income ones that do not need it would also recieve it
• argued that it can be financed only if there were serious cuts in other social services such as transfer payments to vulnerable groups
• it may be unreasonable to cut money going to people who need it in order to provide an income to everyone including those who do not need it
• ALTERNATIVE PROPOSED: to offer a basic income only to people whose income falls below a certain amt
• Some people may lose the incentive to work
• Opp costs of gov spending due to diversion of funds from other priority areas like health care and education

Question 58

Policies to reduce discrimination

Answer 58

• Legislation is usually common in all countries to forbit discrimination in the workplace
• Govs ensure employers are informed abt laws on discrimination
• Efforts must be made to educate employers on the benefits of multiculturalism
• ADDITIONAL MEASURES:
  1. Management training on anti-discrimination practices
  2. Communication of anti-discrimination policy to employees
  3.

Question 59

Minimum wage legislation - gov intervention in markets

Answer 59

• sets a legal minimum wage
• raises the lowest possible wage above the equilibrium market level, raising wages of low-income
• econ theory: this will create unemployment
• actual practice: often not the case + therefore works to improve income distribution, whilst increasing employment.

Question 60

Price control - gov intervention in the markets

Answer 60

1. food price ceilings that set maximum prices for certain food products (prices below market-determined equilibrium price)

• makes food more affordable for low-income groups
• rent controls that set maximum rents to support low-income people

2. Price floors for farmers that set legal minimum prices for certain agricultural products

-raising prices above equilibrium market price in order to support farmers’ incomes

+ both lead to allocative inefficiency + loss of social surplus