Income, Equity and Disparity

Question 1

Macro Goal

Answer 1

• Establish equity in the distribution of income in a country
• Disitinguish between equity and equality
• Distinguish between absolute/extreme poverty and relatively poverty

Question 2

Causes of Poverty (6)

Answer 2

• Inequality of oppourtunity
• Different levels of resource ownership and human capital
• Discrimination (gender, race, others)
• Globalization
• Technological change
• Unequal status

Question 3

Measuring Poverty

Answer 3

Single indicators:

• International poverty lines
• Minimum income standards

Composite indicators:

• E.g. Multidimensional poverty index (MPI)

Question 4

Consequences of Poverty

Answer 4

• Low living standards
• Lack of access to sufficient health care
• Low levels of education

Question 5

Lorenz Curve

Answer 5

Shows the income distrubution of the economy

• 45º line shows perfect income distribution

The further away from the curve, the unequal the country is

Question 6

Gini Index

Answer 6

Gives the exact measuremant of the income distribution of the economy.

It is a number between 0 - 1 or 0 - 100:

The closer to 0 - the more equal it is

The closer to 1 - the less equal it is

Question 7

Income

Answer 7

Economics payment (rent ,wages, interest, profit) paid over a period of time. These can be earned or unearned.

Unearned - interest payments, inheritence, rent earned from real estate

Earned - salary

Question 8

Wealth

Answer 8

Stock of economic goods and services owned and measured at a particular time

Question 9

Direct taxes

Answer 9

Taxes on income:

• Income tax - tax on personal income
• Coporate tax - tax on profit
• Inheritance tax - tax on the transfer of income and wealth

Question 10

Indirect tax

Answer 10

Taxes on goods and servives (including tariff)

Question 11

Tax Systems

Answer 11

Progressive tax system - the rate of tax paid increase as income increases

Proportional taxes - The rate of tax paid remains the same regardless of income

Regressive taxes - The rate of tax paid decreases as income increases

Question 12

Evaluation comments for Transfer payments

Answer 12

• Not included in GDP as they aren’t payments for goods or services.
• Government provision of merit goods helps distribute income

Question 13

How governments use tax income

Answer 13

transfer payments - any payment that the government makes to a particular group of society.

Use to redistribute income from wealthier taxpayers to poor/in need to improve living standards.

Question 14

Ways to make income distribution more equitable

Answer 14

• Taxation
• Transfer payments: subsidies, unemployment benefits and disability benefits
• Improve access to education and healthcare to create jobs and lower corruption

Question 15

Further policies to reduce poverty, income and wealth inequalities

Answer 15

• Policies to reduce inequalities of opportunities/investment in human capital
• Transfer payments
• Targeting spending on goods and services
• Universal basic income
• Policies to reduce discrimination
• Minimum wage

Question 16

Universal Basic Income (UBI)

Answer 16

• A government-guaranteed minimum income for every individual
• Very expensive - only an option for rich country
• Can only work if the people are responsive to the UBI

Question 17

Pros of UBI

Answer 17

• Help people make ends meet during tough times
• Safety net for those in unstable jobs
• Allows some planning for the future
• Changes people’s attitude to work
• Relatively easy for government to administer
• Durring recessions, it would help cushion fall in AD
• Could help to break poverty traps

Question 18

Cons of UBI

Answer 18

• Encourages laziness and over-relying on it
• Very expensive for government
• Unproven, experimental data
• Discourages working
• Renders taxes for low income brackets less useful
• Not helpful for tax payer
• Economy would see a significant rise in AD (inflation)
• Discourages individuals from taking up full-time jobs

Question 19

Minimum wage

Answer 19

The minimum wage employers must pay for work, not negotiable

Question 20

Pros of raising minimum wage (similar to Business)

Answer 20

• Work done by minimum wage workers cannot be done by machines
• Motivate people to work
• Higher productivity
• Encourage to stay in their jobs longer
• Reduce costs in hiring and training new workers

Question 21

Cons of raising minimum wage

Answer 21

• Higher costs of production = higher prices to consumers
• Price of labor increase = machines replace workers
• Business that cannot afford to pay higher wages –> bankrupt –> unemployment
• Higher min. wage –> less demand for workers –> unemployment for unskilled workers working at min. wage

Question 22

Average tax rate

Answer 22

• % of tax paid by an individual of their whole income
• total tax paid/income x 100

Question 23

Marginal tax rate

Answer 23

• change in % of tax paid compared to change in income
• change in total tax paid/change in income x 100