Microeconomics: Income and wealth Flashcards
What is the definition of the distribution of income?
How incomes are shared out between individuals and households.
What is income?
The reward for the services provided by a factor of production e.g. salary, wage, interest on savings, profits.
What is the difference between income and wealth?
Wealth is a stock of assets e.g. money, houses, and land, whereas income is a flow overtime.
How is income distributed in the UK?
The average gross income of the richest 10% is over 27 times higher than that of the poorest 10%.
Average net income of the richest 10% is almost 10x higher than that of the poorest 10%.
Why is income unevenly distributed in the UK?
Income earning assets are distributed unevenly:
Factor incomes (wages, rent, interest, profit) are not received by everyone e.g. if you don’t have land, you can’t pay rent.
Assets are not income but can guarantee income e.g. money can generate interest.
Difference in wages:
Globalisation and international migration of workers (can help highly skilled workers earn more e.g. teachers in Dubai but builders may earn less)
Reliance on benefits
Age
Gender
What is the definition of distribution of wealth?
How wealth is shared between individuals and households.
How is wealth distributed in the UK?
Richest 10% have 45% of wealth.
Poorest fifth of people have no wealth.
Richest 50% own 91.3% of the wealth, leaving the poorest half of the population with just 8.7%.
Why is wealth unevenly distributed in the UK?
Differences in how we spend on income- some people spend money on assets that depreciate (outdated technology) e.g. cars, TV. Some people not spending on assets e.g. holidays. Some invest in businesses.
Inheritance, gifts and luck:
The wealthy can pass their assets on, the poor have no assets to pass on.
Ability to benefit from capital gains (people with 2 houses).
Wealth taxation vs taxation of income (In the UK, income is taxed heavily than wealth).
What are the consequences of the differences in income and wealth in an economy?
Poverty and deprivation (access to clean water, electricity, toilets) - some people don’t earn enough for a minimum standard of living.
However, the government provides housing benefits, universal credit to help those in poverty.
Poor health- the rich can afford private healthcare, prescriptions to get the best healthcare however the poor rely on the NHS with longer waiting lists.
Lifestyle, diet
This can impact economic growth and productivity because the poor are too sick to work so the government has to spend more on benefits.
However, in the UK healthcare is free. The UK government gives out vouchers.
Inequality of opportunity- the best teachers work in the best school- better education- better jobs.
Loss of human capital.
However, there are scholarships, contextual offers, bursary.
Impacts on growth due to lower spending- the poor have a high MPC, the rich have a high MPS (impacts economic growth).
Increased incentives to work harder, educate.
Should we aim to reduce inequality?
Communism doesn’t work in the long-run.
We need the incentives for growth and productivity - create wealth.
Some inequality is fine but everyone should have an adequate standard of living.
Taxing the rich more can result in them leaving.
