macro 3.4 - economics of inequality and poverty Flashcards
define equality
situations where economic outputs are the same (or similar) for different people or social groups
define equity
concept of fairness or evenness; an economic objective
meaning of economic inequality
How wealth, assets, or incomes are unequally distributed among individuals and populations.
what could be the effect of economic inequality?
it can hinder economic growth
define income
when FOPs are exchanged for their respective payments
why is some form of inequality in society unavoidable?
because a market-based system remain the most efficient way to allocate resources within a society; however, this is based on ownership of resources, which only a few – typically business owners – have access to. Most work as employees, who typically earn less than business owners.
what are the pros of income inequality?
Individuals who are more efficient at their jobs earn more, individuals who are less efficient receive lower income.
- This allows the market to naturally segregate people into jobs that would suit their skills and needs of society.
- Increased wealth is an incentive to be more productive and have a sense of fulfilment.
define wealth
refers to assets and includes ownership of property, bonds, shares of company, etc
why may unequal incomes lead to unequal distribution of wealth?
because wealth takes time to acquire and requires heavy savings and investment. this generally causes wealth to be usually passed from generation to generation
explain how inequality of opportunity may lead to inequality of outcomes:
Education, healthcare, and job opportunities are not solely based on achievements, hard work, or sensible life choices but on circumstances at birth, like gender, ethnicity, place of birth, parent’s profession/socioeconomic background
function of the Lorenz curve and GINI coefficient
measures the distribution of income within a population
describe Lorenz curve
X Axis: cumulative percentage of population
Y Axis: cumulative percentage of income
- Line of perfect equality: the first 10% of the population have 10% of the income, etc.
- The closer the Lorenz curve is to the line of perfect equality, the more equal income distribution is
equation for GINI coefficient
𝐴/𝐴+𝐵
GINI C=0
no distance between lorenz curve and line of perfect inequality; income is equally distributed
GINI C= 1
no section B; last person in society is earning all the income in society.
define poverty
a state or condition in which a person or community lacks the financial resources and essentials for a minimum standard of living.
define absolute poverty
Internationally-defined level of poverty, where impoverished people earn below a certain level of income and have an unacceptable standard of living. (Currently, the line is at $1.90 per day)
criticisms of absolute poverty
- Can be argued that an arbitrary number does not consider the differences and complexity between countries.
- Just because someone earns above the poverty line does not mean they are no longer in poverty
define relative poverty
Locally defined level of poverty, where impoverished people earn below a certain level of income.
less than 60% of median income
how is relative poverty calculated and what is a criticism of this method?
- Determined by country’s national (average and/or median) income and other specific country factors
- Will need to be changed at regular intervals, to account for inflation
give 2 single indicators that measure poverty
international poverty lines, Minimum income standards
cons of the international poverty line
does not take into account basic facilities, such as sanitation, water, and electricity, and their effect on quality of life.
international poverty line
- Represents a monetary threshold for which an individual is considered to be in poverty
- Calculated by taking the poverty line for each country and the value of goods needed to sustain one adult (basic food, clothing, and shelter changes).
Minimum Income Standards
Level of income that is considered necessary to maintain a basic standard of living, covering essential needs such as food, shelter, clothing, healthcare, and education.
give 2 composite indicators of poverty
HDI, Multidimensional Poverty Index
HDI (Human Development Index)
Based on three main factors: GDP per capita, life expectancy, years of schooling (mean and expected)
MPI (Multidimensional Poverty Index)
- Based on three main dimensions: health, education, and living standards. These have equal weighting in deciding poverty
- A person is considered to be multidimensionally poor if they experience deprivation in at least 1/3 of the indicators
give 4 difficulties of measuring poverty
Imperfect data
Intra-Household poverty
Urban poverty
Disaggregated poverty data
imperfect data
Type of sampling and weighting given to the data may not accurately reflect poverty (household surveys, for example, might suffer from sampling errors, non-response bias, or underreporting).
Intra-household poverty
- Measuring poverty at the level of households ignores individual poverty
- Example: Women may have less resources than men, so they experience a higher level of poverty
Urban poverty
Measurements may be skewed towards rural poverty; sometimes do not account of essential goods and services in the cities (eg transport)
Impact of crime/social tensions, pollution and its health consequences, and low social status for those with informal livelihoods are not taken into account
Disaggregated poverty data
Poverty data in relation to age, gender, and disability is not often produced at a local and international scale
8 Causes of economic inequality and poverty
- inequality of opportunity
- different levels of resource ownership
- different levels of human capital
- discrimination (gender, race and others)
- unequal status and power
- government tax and benefits policies
- globalisation and technological change
- market-based supply side policies
inequality of opportunity
- People living in the same society do not have access to the same opportunities: education, healthcare. This may be due to gender, ethnicity, and parental background, which individuals have no control of.
- These factors can improve an individual’s standard of living and promote social mobility
- However, only those with wealth and high incomes have access to these opportunities, thus perpetuating the cycle of inequality.
Different levels of resource ownership
- Some people inherit wealth in the form of bonds and stock, giving them an income advantages and something to fall back on during unemployment
- They can also increase their wealth at a rapid pace
Different levels of human capital
- Depending on the occupation, there may be an excess supply of labour alongside a low demand for them, which would lower real wage levels. As more people move into such occupations, wages would become less equitable and unfair – desire to lower costs lead to worse working conditions and legal protections as well
- Some may also lack the necessary education and skills to obtain a good job, making it difficult to find a decent earning job; tied to inequality of education opportunities
Discrimination
- Act of treating a person or social group unfairly based on gender, race, age, or disability
- Example: women earn less than men as evidenced by the gender pay gap
Unequal status and power
Unequal status and power refers to inequality based on differences in esteem and respect
-> Cultural beliefs can influence relationship and income as those who are perceived as “better” earn more, even if others have the same or even better abilities and skills
Power is a concept which refers to the capacity or ability to do or not to do something.
-> Those with higher status can take advantage of their circumstances and obtain higher pay jobs, opportunities, and benefits
Government tax and benefit policies
Government policies can favour the accumulation of capital and reward those with capital and higher incomes through favourable tax policy
Wealthy have more opportunities to keep and expand their wealth
Globalisation and technological change
- Potential to increase unemployment rates and create a lack of jobs that were once thriving due to AI replacing them; typically blue-collar jobs
- Trade based on specialisation and comparative advantage has the potential to increase economic growth and incomes, but it can also lead to increase in inequality and poverty
- Countries will manufacture and purchase goods in cheaper countries, therefore local countries can be losers. They can also monopolise the industry, thus widening the gap between the rich and poor.
- Higher profits for multinational firms, increasing inequality.
- Creates inequality for low-skilled workers
Market-based supply policies
- Supply-side policies aim for long-term economic growth by shifting the LRAS curve; typically involves lowering the cost of production, but can contribute to higher levels of inequality through:
- Competition, such as deregulation or trade liberalisation
- Labour reform, reducing the power of unions and reducing unemployment benefits
- Incentive-related policies, such as cuts in personal income or capital gains tax
give 3 impacts of income and wealth inequality
Economic growth
Standards of living
Social stability
economic growth
When a significant portion of the population earns below an acceptance level of income:
- Lower consumption due to low income
- Lower productivity if the workforce is unskilled or there is widespread unemployment; less people to innovate and improve quality of FOPs
- the prospects of future generations will also be reduced
There are significant costs for the government when large proportions of the population are in poverty: tax revenues are lower, benefit payments are larger, the entire economy is less productive, the entire population is less healthy, there may be increased crime rates and political difficulties, and so on.
Standards of living
A loss or reduction of income results in a fall in the standard of living for people affected by poverty
Social stability
Opportunity costs are greater for people in poverty, as they have greater need for basic necessities, while having a lower amount to spend on such needs. This level of despair may lead to social unrest and perhaps a change of government, if people see that their systems do not help.
The role of taxation in reducing poverty, income inequality and wealth inequality
- An effective tax policy evens out the imbalances in income in the country, and can be used to fund state provision of essential services
- Governments can tax the population through their income as it has the ability to redirect money from the upper-class to the lower-class
what is a disadvantage of taxation?
Could be argued that it creates a loss of welfare for markets and desensitises people from working harder; hence, it can be inefficient
3 main types of taxation
Progressive
proportional
regressive
progressive
→ People being taxed higher rates of tax the more they earn
regressive
→ Where the percentage paid in tax rises the less a person earns
Proportional taxes
→ When everyone pays exactly the same percentage of tax
Direct taxes
Taxes that are paid directly to the government from an individual’s income, corporate’s income, and personal wealth
Personal income
Tax on income paid by individuals and sole traders
Varies between country to country, but it tends to be the most progressive tax, especially when people are being taxed higher rates the more money they earn
what does the degree to which personal income tax helps in redistributing wealth depend on
the gap between income before tax and disposable income after the tax is paid. The bigger the difference is, the more taxes equalise income, as high-income earners pay higher average tax than others.
If earners are being taxed higher rates the more money they earn. It can contribute to income/wealth distribution.
Corporate income
imposed on the income or capital of corporations and companies
- Can tax the net profit of companies and dividends of shareholders or on asset/payroll
- Research shows that corporate tax cuts benefit only the top-income earners and make them even richer.
wealth tax
- Tax on entity’s holdings of assets: cash, bank deposits, and real estate
- Seeks to reduce the accumulation of wealth by individuals; wealth inequality has increased in recent decades and is far greater than income inequality
indirect tax
Taxes which are not directly charged on people’s income or wealth; paid indirectly by consumers when they purchase a good
give 4 further policies to reduce inequality
Transfer payments:
- Unemployment Benefits
- Child Allowances
- Old-Age Pensions
Targeted Spending on goods and services:
Universal basic income (UBI):
Policies to reduce discrimination
evaluate the imposition of a minimum wage
