Macro 18 - Poverty and Inequality Flashcards
Define the term absolute poverty
Absolute poverty exists when a person’s continued daily existence is threatened because they have insufficient resources to meet their basic needs such as food, shelter, clothing, access to clean water, sanitation facilities and education
Define the term relative poverty
Relative poverty exists when a person is poor compared with others in their society
What type of poverty is most poverty in developed countries?
Most poverty in developed countries tends to be relative poverty
How is relative poverty measured?
People are considered to be in relative poverty if they are living below a certain income threshold in a particular country
What are the different ways of reducing absolute poverty?
- Economic growth to generate higher income and output
- Foreign aid
- Increased provision of education
- Debt relief for countries
- Microfinance schemes
- FDI by multinationals into the country
- Remittances - where family members working overseas send wages home, this boosts GNI relative to GDP
Define the term inequality
Inequality occurs when the distribution of income and wealth is unequal
What is one way that inequality can be measured?
Quintile groups
What are Quintile groups?
Quintile groups refer to fifths of the population in order of income
What is a Lorenz curve?
A Lorenz curve is a curve which shows the degree of inequality of income in a society
What goes on the x-axis of a Lorenz curve?
Cumulative percentage of population
What goes on the y-axis of a Lorenz curve?
Cumulative percentage of income
Draw a Lorenz curve with 3 curves including the line of perfect equality, slight inequality and much larger inequality
See page 7 in pack 18
On a Lorenz curve how can we tell which curve shows the greatest amount of inequality?
The further away a curve is from the line of perfect equality, the more inequality there is
What is the Gini coefficient?
The Gini coefficient is a statistical measure of inequality of income that works by comparing how distribution of income in a society compares to a society in which everyone earns exactly equal amount of income
What does a Gini coefficient of 0 mean?
A Gini coefficient of 0 represents perfect income/wealth equality
What does a Gini coefficient of 1 represent?
A Gini coefficient of 1 represents a highly unequal distribution with all the country’s income earned by a single person
What is the formula used to calculate the Gini coefficient and what are the different variables?
Gini coefficient = A / A+B
- A represents the area between the diagonal line and the Lorenz curve
- B represents the area under the Lorenz curve
What set of values can a Gini coefficient take?
The Gini coefficient will have a value between 0 and 1 with 0 representing absolute equality and 1 representing absolute inequality
As the Gini coefficient gets bigger …
there is more inequality
What can wealth inequality be explained by?
- Income inequality
- Wealth - wealth can lead to more wealth
- Chance/luck
What are some policies used to alleviate poverty?
- Benefits
- State provision
- Progressive taxation
- Economic growth
- National minimum wage
What is a progressive tax system?
A progressive tax system means that high earners pay a greater percentage of their income in tax than low earners
What is a regressive tax system?
A regressive tax system means that low earners pay a greater percentage of their income in tax than high earners
What is a proportional tax system?
A proportional tax system means that all earners pay an identical percentage of their income in tax
What type of tax to direct and indirect taxes tend to be?
- Direct taxes tend to be progressive
- Indirect taxes tend to be regressive
What is the general rule for tax bands?
The higher rate of income tax is only paid on the extra income
What are the causes of wealth and income inequality?
- Education, training and skills
- Wage rate
- Strength of trade unions
- Degree of employment protection
- Pension entitlements
- Benefits
- The tax system
What is capitalism?
Capitalism is an economic system based on private ownership of the means of production and their operation for profit. Characteristics central to capitalism include private property, capital accumulation, a market for labour, free trade exchange, a price system and competitive markets
What is the difference between income and wealth inequality?
- Income inequality refers to the unequal distribution (flow) of income to households
- Wealth inequality refers to differences in the amount of assets that households own
Why does capitalism generally lead to inequality?
Under capitalism:
- Workers with higher skills receive higher wages
- Workers with little to no skills receive little to no wage
This means that individuals with higher incomes will acquire more assets leading to higher levels of income whereas individuals with lower incomes will find it harder to acquire assets leading to wealth inequality as a result of income inequality
