Income and Wealth Flashcards
Income
the flow of money received from the factors of production
wealth
The stock of assets households own
- property, shares
Wealth inequality
When wealth is shared unequally between population
Equality
Fair distribution of income and wealth in society
Equity
There is fairness in the distribution of income / wage differentials
Example of income inequality in the US
In 2017, an average CEO was paid 271 times more than an average production worker
Causes of wealth & income inequality
- Human capital
- Assets
- Discrimination
- Government policies
- Globalisation
Main measures of income inequality
- Lorenz curve
- Gina coefficient
The Lorenz curve
Measures income inequality across all countries
What does the line of perfect equality
Perfect income distribution
Gini coefficient formula
A/A + B
What do the letter in the gini coefficient represent
- A represents the area between the line of equality and the Lorenz curve
- B represents the area under the Lorenz curve
What does a value of 0 indicate
Perfect equality, so everyone had the same income and wealth (socialism)
What does a value of 1 indicate
Total income inequality, all the wealth in the country is concentrated in one individual household
What do governments use to shift the gini coefficient close to zero
- Progressive taxation
- unemployment benefits
Costs of unequal distribution
- disincentives workers and can result in declining economic growth
- poorer living standards
- instability
Main factor that influence inequality
- Minimum wage rates
In 1997 in the UK, there was now MW as a result workers were paid very little as there wasn’t an amount employers hash to pay their worker by law. Blair promised to do smth during his election and introduced a NMW when he won, made UK workers legally obliged to earn a certain amount. - This meant that rich workers earned less due to higher costs and less profits and poor workers earned more due to NMW, reducing income inequality
Factor that influences inequality - assortative mating
When rich women marry rich men and pass on their income and wealth to their children to be more rich.
- As a result, the rich get richer and income inequality gets worse
What is the r>g hypothesis
By Piketty, rate of return on wealth is greater than the growth rate so wealth inequality will worsen
If you start off with lots of wealth, you end up with more wealth
Wealth gap
Difference in wealth between different groups in society.
This can be due to inheritance
Costs of income and wealth inequality
- Social tensions:poorer members of society may resent richer members of society. This may lead to friction, crime and rioting.
- Creation of ‘underclass’
Benefits of income ad wealth inequality
- Incentive effects: existence of high earners and rich suggests the possibility of many ppl being able to earn high salaries through hard work or setting up businesses. Free markers economists would argue this incentives generate economy growth
- Trickle down: free market economist argue that economic benefits of having high earners can ‘trickle down’ to all sectors of society as business owners can create employment opportunities. They may also pay higher taxes which, which can be redistributed to raise the living standards of the poor and can be used to fund merit goods
Absolute poverty
When people can’t afford basic necessities to sustain life.
How is a absolute poverty measured
The World Bank measures it by looking at people living on less than $2.15 a day
