Income and wealth [2.4.1] Flashcards
What is wealth?
Wealth isa measure of assets owned by someone used to generate income.
Savings held in a bank deposit account.
Ownership of shared of listed companies
properties such as land
What is income?
Income is a flow of money earned by people Disposable income
Wages, salaries, profits flowing to businesses, rental income.
What impact does inequality have on the economy?
Less savings
Lower consumption
Lower AD
Less SRAS
More government debt used to increase AD
Why has inequality in the UK increased?
Industrial revolution allowing economies to develop.
Skill based technologY, technology compliment for skilled workers replacement for low skilled workers
Tax policies and genders
Can inequality be improved?
Need wealth for investment cannot improve maximum capacity for an economy to grow
What are the major causes of inequality?
Changes in the highest rates of income tax.
Increase globalisation leading to a fall in wages for low skilled workers.
Increase MNC’s companies that minimise their taxes through the use of tax havens.
In recent years low interest rates and quantitate easing has resulted in high asset prices for houses and shares.
Education and labour skills.
What are the main consequences of inequality?
Incentive effect: If someone workers harder and as a consequence receives a higher wage then the promise of a higher wage is essential to encourage extra effort.
Entrepreneurs require rewards: Inequality is necessary to encourage entrepreneurs to take risks and set up a new business
Trickle down effect: If some gain extra income then it can trickle down to other people like if an entrepreneur sets up a business creates jobs and therefore income
Fairness: It can be argued that people deserve to keep higher incomes if their skills merit it. If the worker is deemed valuable
Inequality stifles growth: If large numbers of the population are in poverty then there will be a lack of consumption affecting total AD.
Inequality decreases education: unequal societies tend to underinvest in education leading to lower productivity.
Inequality decreases health lower life expectancy more ill health burden on health spending.
How an inequality be reduced?
Increasing progressive taxes such as the higher rate of income tax from 40% to 45% will take more tax from those on high income levels enables cuts in regressive taxes and increased welfare benefits.
National minimum wage the government can increase this.
Universal; basic income or giving ever citizen a weekly basic living standard regardless of circumstances and income ensuring everyone has a minimum income guarantee.
Reduce unemployment Unemployment is a major cause of poverty unemployed have little income relying on state benefit.
How does the basic model of the circular flow work?
Households own all wealth and resources provide firms with all FOP in return for wages.
Use this money to buy goods and services produced by the firms.
Money flows in one direction and goods services and FOP flow in another.
Measuring economic activity by national output, value of the flow of goods and services from firms to households and national expenditure.
