Income & Wealth Distribution Flashcards
what is the definition of income ?
the flow of money received from the factors of production
(Rent, wages, interest and profit)
what is the definition of wealth ?
the stock of assets that households own
(Property, shares, art, pension schemes)
how is income inequality caused ?
the unequal flow (distribution) of income to households
how is wealth inequality caused ?
differences in the number of assets households own
what are the causes of inequality ?
. human capital (poor education system will see greater inequality, higher skills means higher incomes)
. inequality & opportunity (poor education and healthcare systems, means job opportunities are less)
. assets (generate income)
. discrimination (gender, race etc.)
what is equality ?
economic outcomes are similar for different people
what is equity ?
refers to the idea of fairness
what are the 3 main measure of inequality ?
Lorenz Curve
Gini Coefficient
HDI (Human Development Index)
what is the Lorenz Curve ?
a visual representation of income inequality that exists between households in an economy
how is the data often presented in a Lorenz Curve ?
quantiles (population is divided into 5 groups)
&
deciles (population is divided into 10 groups)
what does perfect equality look like on a Lorenz Curve ?
directly proportional straight diagonal line
how do you work out the Gini Coefficient ?
(Area A) / (Area A + Area B)
if the value you get from the Gini coefficient is 0 what does that tell us ?
perfect equality
if the value you get from the Gini coefficient is 1 what does that tell us ?
perfect inequality
what are 2 ways the government can shift the Gini Coefficient closer to 0 (perfect equality) ?
progressive taxation
welfare payments
what is Capitalism ?
an economic system based on private ownership of the means for production & profit.
why does capitalism inevitably lead to inequality ?
those with higher skills receive higher incomes
those with little to no skills receive little to no income
why is capitalism to a certain extent essential ?
gives us the incentive to acquire a higher income, productivity, and output
what are the costs of inequality ?
- disincentives (inequality can act as a disincentive to work as society is unfair)
- living standards (rich get richer, poor get poorer)
- social instability (higher levels of crime, instability, and social unrest)
what is absolutely poverty ?
where individuals cannot afford the basic necessities for existence (prevalent in developing countries)
what is relative poverty ?
where households incomes is a certain % less than the medium household in the economy
what is the poverty cycle, how does it cause problems ?
Low economic growth -> low wages -> low saving -> low investment -> low levels of education and healthcare -> low levels of human capital -> low productivity
what are some policies to Alleviate Poverty ?
. reducing protectionist policies (encourages economic growth)
. investing in supply-side policies (education)
. state benefits (welfare payments)
. progressive taxation
. minimum wage
what is the Laffer Curve ?
a diagram showing how as taxes are increased, tax revenue will also increase up until a certain point, once its reached that point it will fall (tax revenue), due to the disincentives of a higher tax
