Inequality

Question 1

What is income?

Answer 1

Flow of money going to factors of production E.g. wages, rental income

Question 2

What is wealth?

Answer 2

Value of stock of assets E.g. savings, ownership of a property, shares etc

Question 3

What are the main types of household wealth?

Answer 3

1) Physical wealth
2) Pension wealth
3) Housing wealth
4) Financial wealth

Question 4

What is inequality measured by?

Answer 4

GINI coefficient = 0 equality 1 extreme inequality

Question 5

What could be classed as poverty?

Answer 5

• Hunger
• Lack of shelter
• Not being able to see a doctor
• No access to school

Question 6

What can poverty be caused by?

Answer 6

Lack of income, lack of wealth or both

Question 7

What’s the median income in the UK roughly?

Answer 7

£29,000 per annum or approx £580

Question 8

Where is the poverty line about?

Answer 8

60% of the median household income so approx £348 (relative poverty)

Question 9

Cause of wealth inequality?

Answer 9

Exacerbated when property rises in price

Question 10

What are deciles?

Answer 10

Divide the population into 10% groupings

Question 11

What are quintiles?

Answer 11

Divide the population into 20% groupings

Question 12

What is the Lorenz Curve?

Answer 12

Describes income distribution. Vertical axis % of total income in the economy. Horizontal axis % of population

Question 13

Importance of inequality

Answer 13

High income inequality has negative consequences

Question 14

Why is inequality a negative for AD

Answer 14

If sections of the economy are deprived they will not contribute to economic growth

Question 15

How does inequality negatively affect LRAS?

Answer 15

The poor may not afford to be in school, affects the quality of human capital

Question 16

How does inequality negatively affect SRAS?

Answer 16

Employees trapped on a low wage cycle creates disincentive effects

Question 17

How does inequality negatively affect economic development?

Answer 17

Low pay contributes to ill health and range of social levels of adult literacy

Question 18

What is inequality?

Answer 18

Is an unfair situation in which some peoples have more rights or better opportunities than other people

Question 19

Why could it be said that inequality is good for the economy?

Answer 19

1) Too much equality stifles ambition and makes people lazy and even more unproductive
2) can lead to the “trickle-down effect” if the rich gain an increase in income, then they will spend a proportion of this extra income, could be because of less regulation on tax, tax cuts etc. Causing an increased demand for goods and services, causing higher employment and rise in wages. Higher wages can cause the ‘multiplier effect’

Question 20

What is the trickle down effect?

Answer 20

Argues for income and capital gains tax breaks or other financial benefits to large businesses, investors, and entrepreneurs to stimulate economic growth as this ‘trickles down’ to everyone else

Question 21

Why could it be said that inequality is bad for the economy?

Answer 21

May be less opportunities, worse education, less qualified people could potentially reduce LRAS

Question 22

What is absolute poverty and how many people globally fall under this category?

Answer 22

Earn less than $1.90 per day

700m 10% of the world population

Question 23

What are the conditions of absolute poverty?

Answer 23

• Lack of safe drinking

- Lack of food

Question 24

What is relative poverty defined as?

Answer 24

In relation to the overall distribution of income or consumption in a country

Question 25

What is relative poverty in the UK?

Answer 25

if they are living in a household with income below 60% of median household income in that year

Question 26

Causes of poverty?

Answer 26

• Unemployment - cyclical, structural (may be long-term unemployment)
• Poor education and health. Low productivity, low wages, poverty traps (A situation in which there is little incentive for workers earning a low income to earn extra income)

Question 27

Consequences of poverty?

Answer 27

• Unemployment is created, RDI reduced, C reduced, AD shifts left, structural and cyclical unemployment, above NRU, increased crime rates, it’s depends if this causes hysteresis. Economic development slowed down, this can be changed through welfare benefits, fiscal policy increased
• The availability of the labour force has increased, makes it easier to hire and fire. Cost for firms may be lower, as they can employ workers at a lower wage rate . It’s depends if there are government policies and legislation directly impacting on minimum wages etc

Question 28

Causes of income inequality?

Answer 28

1) Technology - Increased reliance on technology means those with the ability/education and background to take the advantage of this can see their incomes grow quickly
2) Political decisions - e.g. more regressive taxes, less progressive. Cuts to means tested benefits (e.g.Universal Credit) and promotion of non-means tested benefits (e.g. winter fuel allowance)

Question 29

Causes of wealth inequality?

Answer 29

1) Culture within a country E.g. class system, traditions which go unchallenged. In the UK 25,000 landowners - typically members of the aristocracy and corporations - have ownership of more than half of the country
2) Weakness in taxation systems - the wealthy have access to sophisticate tax avoidance schemes meaning wealth can be moved to tax havens. Not paying tax in the UK so the government haven’t got access to that money for redistribution

Question 30

General consequences of inequality?

Answer 30

Overall, high inequality causes instability, hampers long-term growth and reduces a country’s economic potential

Question 31

List some of the consequences of inequality?

Answer 31

1) Reduced opportunities for many, in education, employment etc. Greater inequality will move LRAS left as human capital is undervalued
2) Higher levels of debt - increased inequalities can lead to less fortunate members of the population borrowing more and more in order to not fall behind. Increases in debt could be inflationary, lowering confidence and ultimately shifting AD to the left

Question 32

How can the government reduce inequality?

Answer 32

1) Progressive taxation policies
2) Improve labour mobility E.g. good training schemes
3) More government spending on merit goods (health and education)