Inequality 4.2

Question 1

Wealth v Income

Answer 1

Wealth = stock of assets e.g. house, cars, land

Income = money received on a regular basis

Question 2

Lorenz Curve

Answer 2

Y-Axis = Cumulative % of Income

X-Axis = Cumulative % of Population

Line of Perfect Equality = A basic axis going from origin

The further away the Lorenz Curve is from the LoPE the less equal society is e.g. Norway v South Africa. Curve should start at origin, curve towards right (below LoPE) then return to the line at the end

Question 3

Gini Coefficient

Answer 3

Mathematical Indicator of Inequality, can be used when talking about redistributing income. Say moves gini-coefficient towards 0

Section A is the area between the Lorenz Curve & Line of Perfect Equality

Section B is the area beneath the Lorenz Curve

Gini = Section A/Section A+B

0=Perfect equality, 1=Perfect inequality

e.g. Norway = 0.25, South Africa = 0.65, UK = 0.35

Question 4

Policies to redistribute Income / Wealth & Reduce Poverty/Inequality

5

Answer 4

Progressive Taxation - However, Laffer Curve would suggest increased tax rates could mean less revenue (around 50%) as big earners lose incentive to work or Capital Flight/Tax offshoring e.g. Cayman Islands

Increased Transfer Payments/Benefits - However, poverty trap could occur as people lose incentive to work. + worsens gov. finances (in 2020 welfare was 10% of Gov. Expenditure) which could lead to Austerity in LR. Also relies on welfare being effective e.g. in USA they have progressive tax but Welfare system is very inefficient

Min/Max Wages (capping bonuses) - Less incentive to be productive, more costs to firms

Legislation (maternity leave) - Costly to businesses, risk of gov. failure (when gov intervention leads to Net Loss of Economic Welfare) as firms may shut down or move to the nations due to costs

Gov. Spending (Education & Training, Healthcare) - Worsens gov. finances and significant time lags

Eval. - Gov. Intervention based on normative judgements can result in Gov. Failure. Neoclassical economists would state that inequality is a byproduct of a capitalist society and doesn’t always need to be fixed. Gov. Intervention can reduce incentives to work/be productive and can lead to Austerity in the future

Question 5

Capitalism & Inequality

4

Answer 5

Capitalism leads to income inequality due to wage differential, and wage differs depending on supply and demand

Wealth can be passed on through generations

High income individuals have more wealth/assets, which can also give returns that lower incomes do not have access to

Inequality is essential for capitalism to work, as the incentive to gain more encourages hard work

Question 6

Minimum Wage Diagram

Answer 6

Unemployment Is the big square in the middle, use as eval.