Income Distrubution

Question 1

Define Income:

Answer 1

The flow of income over a period of time

It is money that is earned.

Question 2

How is income earned by each factor of production?

Answer 2

Land- rent
Enterprise- Profit
Labour- Wages
Capital- Interest

Question 3

What is the alternative way people can earn income?

Answer 3

In the form of state benefits

Question 4

How has income distribution changed in UK recently?

Answer 4

It has increased.

Question 5

Why does income inequality exist?

Answer 5

• Different compositions of households
• Unequal holdings of wealth
• Occupational structure
• Differences in skills and qualifications
• Discrimination
• Educational inequality
• Differences in hours worked

Question 6

Define wealth:

Answer 6

Ownership of assets

Question 7

What are the two types of wealth?

Answer 7

Marketable: Transferable wealth such as land, stocks, shares, houses, bonds.

Non-Marketable: Nontransferable wealth such as pensions.

Question 8

Why does wealth inequality exist?

Answer 8

• Income inequality
• Differences in enterpenueral skills
• Inheritance
• Marriage patterns
• Asset prices increasing at a faster rate than income

Question 9

What are the axis of the Lorenz curve?

Answer 9

y- Cumulative % of the income

x- Cumulative % of the population

Question 10

The further away the Lorenz curve from the line of equality…

Answer 10

The greater the income inequality.

Question 11

What is the Gini coefficient

Answer 11

Derived from the Lorenz curve, it is calculated by dividing the area between the line of equality and the Lorenz curve by the area between the Lorenz curve and the x axis

Question 12

What are the cases for and against income redistribution?

Answer 12

For:

• it prevents absolute poverty
• income and wealth recreate themselves

Against:

• welfare systems remove the incentive to work and creates allocative inefficiency
• creates voluntary unemployment (replacement ratio)

Question 13

What are the ways the government can intervene to affect the distribution of income and wealth?

Answer 13

Taxation, benefits, benefits in kind, labour market policy and macroeconomic policy.

Question 14

Explain and evaluate how taxation improves income and wealth distribution

Answer 14

Income tax is progressive. As income increases, tax rate increases. There is also a personal allowance (11k that is tax free).
However the most commonly paid taxes are regressive (excise duties).

Question 15

Explain and evaluate how benefits improves income and wealth distribution

Answer 15

Tax credits- some of your tax is given back to you if the government believe you the need money.
But some benefits are universal like the winter fuel allowance and doesn’t affect the distribution of income.

Question 16

Explain and evaluate how benefits in kind improves income and wealth distribution

Answer 16

Education and healthcare which are both goods with positive externalities.

Question 17

Explain and evaluate how labour market policy improves income and wealth distribution

Answer 17

Minimum wage, education and training programmes for the struturally unemployed and compulsory education reduces poverty on the low end of the distribution.
However, minimum wage causes excess supply, increases unemployment and voluntary unemployment.

Question 18

Explain and evaluate how macroeconomic policy improves income and wealth distribution

Answer 18

Fiscal and monetary policy used to keep AD and investment high and unemployment low can improve income distribution through job creation.
However, inflation increases as AD increases. Cetirus paribus may not hold.

Question 19

Define: Absolute poverty

Answer 19

Inability to meet basic needs.

Income under $1.25

Question 20

Define: Relative poverty

Answer 20

The situation in which someone is poor in comparison to others in society.
(<50% of the median income)

Question 21

How can the government reduce relative poverty?

Answer 21

• Implementing NMW/Living wage
• Cutting the bottom rate of income tax
• Move towards indirect taxation
• Increasing employment opportunities
• Increase the provision of council housing/build more council housing
• Improve the quality and quantity of education and training
• Make use of the trickle down effect
• Increase the monetary and universal benefits
• Increase the provision of affordable childcare

Question 22

What are the arguments for national minimum wage?

Answer 22

• Reduces poverty (absolute and relative)
• Reduces the gender pay gap
• Associated with the efficiency wage effect
• People on low wages earn more money and have a higher MPC and so lead to an increase in consumption. (Results in the multiplier)

Question 23

What are the arguments against the national minimum wage?

Answer 23

• It causes unemployment (contraction in supply)
• Makes firms reduce fringe benefits
• Doesn’t reduce income inequality by much due to second wage earners.
• Doesn’t help geographically in terms of relative poverty.

Question 24

What are the causes of poverty?

Answer 24

Unemployment, disability, low wages, elderly, poverty trap, lone parent, social stigma towards claiming benefits