Macroeconomics - Inequality

Question 1

Absolute and Relative poverty definition

Answer 1

Absolute - when a person’s daily existence is threatened because they have insufficient resources to meet their basic needs
Relative - when a person is poor in comparison to others in their society

Question 2

Distinction between wealth and income inequality

Answer 2

Wealth inequality - difference in people’s stock of assets
Income inequality - difference in people’s income flows from wages, dividends, rents e.t.c.

Question 3

Lorenz curve and Gini Coefficient

Answer 3

Line of perfect equality (45 degrees), Lorenz curve below, Gini coefficient A/A+B

Question 4

Causes/methods of reducing of income and wealth inequality

Answer 4

Education/training and skills, wage rate including min wage, degree of employment protection, progressiveness of tax system, ownership of assets and inheritance

Question 5

Kuznets curve

Answer 5

Move of economy from pre-industrial (agriculture based), to industrial, to post-industrial (service sector based). Inequality rises (due to move from low productivity/pay agricultural sector into higher productivity industrial sector), peaks during industrial area then decreases with move to service sector (due to gov. having more resources to redistribute income through tax and benefit system)

Question 6

Inequality in free market and capitalist society

Answer 6

Since people with high skills and abilities attract higher wages compared to those will poor skill levels. Private ownership of resources means some people acquire considerably more assets than others, which in turn generate more income. Some argue its essential for a capitalist system to provide an incentive for individuals to take risks to potentially benefit from any profits made