Inequality and Poverty

Question 1

Income and wealth are Not distributed Equally in a market economy

Answer 1

1. An individual’s incomes is the amount of money they recieve over a set period of time, e.g. per week or per year. Income comes from many sources, e.g. wages, interest on bank accounts, dividends from shares and rent from properties.
2. Wealth is the value in money of assets held - assets can include property, land, money shares etc
3. In the UK, and other countries, income and wealth aren’t equally distributed.
   There are a number of factors affecting the distribution of income:
   - Ppl earn different wages - certain skills are more in demand than others, so workers with those skills are likely to recieve higher wages.
   - Unwaged ppl often rely on state benefits, so their incomes tend to be lower.
   - Tax and state benefits - in the UK there’s a progressive tax system. Those with higher incomes are taxed a higher percentage of their earnings over certain levels. Some of this tax is then redistributed as benefits, e.g. to the unemployed, or to ppl with disabilities.
   - Compared to the private sector, workers in the public sector earn more per week.
   Average full-time earnings also differ considerably between different regions. The highest are in London and the South East. In 2013, the North East and Northern Ireland were the two lowest paid regions.
4. Wealth is more unevenly distributed than income:
   - Wealth often earns income - e.g. shares may increase in value and generate more income. Those who can earn income from their wealth could invest that income again (e.g. by buying more shares), which in turn will generate more income, and so on. This means the wealthy become even wealthier, whereas those with low wealth don’t have much to invest, so their wealth will only grow by small amount.
   - Assets tend to increse in value more quickly than income rises.
   - In the UK, income is taxed, but wealth isn’t - so it’s much easier to redistribute income than wealth.

Question 2

Lorenz Curves show the Extent of Inequality

Answer 2

1. The Lorenz Curve can be used to represent the distribution of income graphically.
2. Along the horizontal axis is the cumulative percentage of income.
3. The diagonal line represents complete equality - e.g. 10% of the popln have 10% of the income, 20% have 20% etc
4. The further Lorenz curve is away from the diagonal, the greater the inequality in the country.
   - In this graph, the lowest earning 50% only earn 8% of the total income.
   - So the highest earning 50% earn 92% of the total income.
   - This represents a large amount of income inequality.

Question 3

Gini coefficients also descrive the Extent of Inequality

Answer 3

1. The Gini coefficient, a measure of inequality, can be found from the Lorenz curve.
2. The Gini coefficient is calculated using the following formula:
   Gini coefficient = area A/ Area A + Area B
3. A coefficient of 0 represents complete equality -i.e everbody earns the same
   A coefficient of 1 represents complete inequality - i.e. one person earns all the income in the country.
4. Wealth and income inequality have become greater in many countries since the early 1980s, with the highest incomes growing particularly quickly.

Question 4

Equity and Equality are Different things

Answer 4

1. Equality means that everyone is treated completely equally - they all get exactly the same things.
2. Equity is more about fairness - ppl have different circumstances, so it’s more about ppl getting what they want next.
3. Equality is positive, whereas equity is normative (based on opinion).
4. There are two types of equity:
   = Horizontal equity (ppl with same circumstances are treted fairly
   = Vertical equity (ppl with different circumstances are treated fairly but differently)
   Example:
5. Ppl with the same level of income are taxed the same amount - this is horizontal equity.
6. Ppl with higher incomes are taxed more - this = vertical equity.

Question 5

The Distribution of income and wealth has big impacts on the Economy

Answer 5

POSITIVES:

1. Inequality provides incentives for ppl to work harder and earn more - so rewarding hard work increases productivity.
2. It encourages enterprise by those who have the funds avaliable to start businesses.
3. It also encourages ppl to work instead of claiming benefits.
4. It may => trickle-down effect - some economists argue that if there’s inequality and greater economic growth, the rich will become even richer and spend more on goods and services, providing more income for the poor. This is known as the trickle-down effect. As a result, relative poverty may increase, but absolute poverty will decrease.

NEGATIVES:

1. Absolute and relative poverty can remain high
2. It restricts economic growth and wastes people’s talent, because the poorest ppl won’t have the funds to start businesses.
3. As incomes rise even higher, ppl generally spend more on imports, so this money would leave the circular flow.
4. Crime is likely to increase because people don’t have what they need.

Question 6

Big Differences in Income and Wealth often mean there’s poverty

Answer 6

1. There are two types of poverty
   a) relative poverty = when someone has a low income relative to other incomes in their country. (e.g. ppl whose income is less than 50% of the average income) So someone from a rich country might be classed as living in relative poverty, even though someone in a much poorer country with the same income might be considered wealthy.
   b) Absolute poverty is when someone can’t afford the very basics - e.g. food and shelter. The minimum income needed for these basics = the poverty line.
2. There are many causes of poverty:
   a) Unemployment - even in a country where the state gives unemployment benefits, the unemployed are likely to be at the bottom level of income in that country.
   b) low wages - workers are most likely to recieve low wages are those with few skills or qualifications.
   c) state benefits rising more slowly than wages - this means the relative incomes of ppl relying on state benefits fall over time.

Question 7

The Poverty Trap

Answer 7

• The poverty trap can affect ppl who are in poverty - these may be ppl relying on state benefits, on those on low wages and means-tested benefits (these are just benefits based on a person’s income).
• When these ppl earn higher wages, they may only actually recieve a small percentage of their wage increase. This is because they’ll need to pay income tax and National Insurance contributions (in the UK), and have their benefits reduced.
• In some cases, this could even cause a drop of their disposable income, and this means their marginal tax rate will be high.
• So the combination of income tax, National Insurance and the benefit system can result in a disincentive for these ppl to find work, or to increase the number of hours they work. Governments might attempt to remove these disincentives.
  (Marginal tax rate is just the percentage that’ll be taken from the next pound you earn).