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Differences in how we spend on income- some people spend money on assets that depreciate (outdated technology) e.g. cars, TV.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?
Yes:
Rich MPC+MPS vs Poor MPC+MPS - the poor have a high MPC because they have a lot of unmet wants and needs so they can’t save. This causes consumption to increase - increases economic growth - unemployment falls as firms need more workers to meet demand - higher living standards - tax revenue increases - government can reinvest back into healthcare, education.
Evaluation= could cause demand-pull inflation if supply can’t meet demand. Inflation is regressive (takes a higher proportion from lower income consumers).
The poor could spend on demerit goods e.g. cigarettes or imports.
No:
Reduces incentives- the unemployed may refuse to get a job - if the amount they receive from benefits is close to when working, then the incentive reduces.
Employed may not seek promotion - taxation increases - think it’s not worth it.
Those at the top may move abroad/seek to tax avoid.
In the UK the top 1% of income earners pay 29% of the government’s income tax receipt.
Less output being produced- impacts economic growth.
Conclusion:
Everyone should have a minimum standard of living. Some inequality is required - provides incentives to work harder.
What is the difference between equality and equity?
Equality is when everyone is treated exactly the same. A completely equal distribution of income means that everybody has the same income. (positive=can be proven)
Equity is when everyone is treated fairly. (normative)
How can the minimum wage reduce inequality?
Higher minimum wage e.g. £11.44 per hour in the UK - boosts work incentives and take-home pay. Might cost some jobs and lead to higher prices. However, this doesn’t occur in reality - businesses production costs increases - cost push inflation - regressive for the poor. Doesn’t help enough people (those who are sick long-term, unemployed. It can lead to better living standards although it doesn’t reduce inequality.
How does the free provision of services reduce inequality?
Free NHS (Private healthcare and education means there is still inequality), state education - access to merit goods (good for society) not based on ability to pay. Universal access not as effective as targeted provision due to service abusers as it is free. However, it helps everyone not just the poor - doesn’t reduce inequality.
How is higher rates of income tax help reduce inequality?
Only policy that earns the government. 45% top rate of income tax might be raised to 50% again. Progressive taxes on the rich lower inequality and raise revenue - spend on healthcare and education. Risk of brain drain (skilled, educated workers leaving the country - impacts tax revenues) and increased tax avoidance.
How does investment in training help reduce inequality?
Helps Government achieve all the 4 macro objectives.
Subsidies for workplace training/internships - helps raise productivity (increase output - economic growth), jobs and real wages. If you are healthy and educated - better jobs - higher taxes however, over 5 million too sick to work. Effective in the long-run (costly and it takes time for people to become educated) but risk of the free rider problem (benefit without paying).
