Pack 6 Macro

Question 1

What is absolute poverty?

Answer 1

measures the number of people who are unable to afford basic needs necessary to survive, e.g food and shelter

Question 2

What is relative poverty?

Answer 2

measures the number of people living below a certain (average) income threshold in a country

Question 3

What are the two methods for measuring absolute poverty?

Answer 3

Poverty line: official level of income that is needed to achieve a basic living standard
HOWEVER: does not indicate how severe poverty is and how far below poverty line they are

Poverty gap: the extent to which an individuals income falls belwo the poverty line
- poverty gap index allows for comparison between countries
- also accounts for the severity
HOWEVER: measure does not differentiate intensity of poverty between the poor

Question 4

What are the measures used to measure relative poverty?

Answer 4

• common measure is to measure the number of percentage of households whose total income is X per cent lower than the median
• e.g in EU and UK it is the proportion of households on less than 60% of median income
• HOWEVER: may not show improvements in living standards if whole country has become better off
• also can be a difference in figures calculate for relative poverty in a country depending on what household income is adjusted for

Question 5

What are the non-income measures of poverty?

Answer 5

• use life expectancy, malnourishment and access to clean water
• can be combined into composite indicators , such as the the World Banks Multidimensional Poverty Measures

Question 6

What are the causes of absolute and relative poverty?

Answer 6

• workers unemployed and so no earning income just benefits
• those employed earning low wages (underemployed)
• inadequate infrastructure available in the country that could limit earning potential
• life circumstances, such as old age or larger households

Question 7

What factors cause changes in absolute and relative poverty?

Answer 7

Economic growth and development: reduction in absolute poverty but rise in relative poverty. as rise in GDP should lead to rises in employment and therefore taking citizens out of absolute poverty
- however, relative poverty rise as those on higher incomes benefit disproportionately

International trade, globalisation and FDI:higher trade=growth and so more employment so in theory reduced absolute poverty
- however, can again increase relative poverty

Government policy:
- policies could make poverty worse by making taxes more regressive. e.g make taxes more regressive (more indirect taxes)

• however the state may reduce absolute poverty for those who cannot earn via state-funded pensions and social housing
• could also reduce relative poverty by making taxes more progressive

Change in asset prices: most likely to benefit high incomes, increase absolute poverty by making houses harder to afford and also relative poverty

Changes in wages:
- wages in low paid occupations fall increase absolute poverty if workers fall below poverty line
- more likely to increase relative poverty, if wages for top earners rise and wages for low income earners do not

Question 8

What is income inequality?

Answer 8

unequal distribution of household or individual income across the various participants in an economy

Question 9

What is wealth inequality?

Answer 9

unequal distribution of household/individual wealth (value of assets)

Question 10

What are the two ways to measure income inequality?

Answer 10

Lorenz curve
Gino co-efficient

Question 11

What is the lorenz curve and what do shifts in it represent?

Answer 11

• axes are cumulative percentage of income and cumulative percentage of the population
• plotted against line of perfect equaltiy to compare

Inward shift:
- reduction in income inequality as it would be nearer the line of perfect equality

outward shift:
- show an increase in income inequality

Question 12

What is the Gino Co-efficient?

Answer 12

• the ratio of the area between the Lorenz curve and the 45 degree line of perfect equality to the total area beneath the 45 degree line of perfect equality
• gino coefficient therefore ranges from 0 to 1:
• when it equals 1 shows the most extreme inequality, where one person has all the income
• when equals 0 shows perfect equality
• nearer to 11 the higher the inequality

Question 13

What are the causes of income inequality?

Answer 13

Level and quality of education: lower skilled=harder to find employment/highly paid employment
- so gov policy towards education/training vital
Level and quality of healthcare:
- relative lack of healthcare means people spend more time absent from work, limiting earning potential
Level of infrastructure spending@
- reduce geographic mobility of workers and so limit access to employment opportunities
- also discourage firms from setting up due to weak transport
Wage rates in different occupations:
Strength of trade unions:
- low levels = unable to protect worker rights
Degree of employee protection:
- national minimum wages
- anti-discrimination legislation
- labour market reforms: zero-hour contracts
The tax system:
- if more progressive rather than regressive incomes more evenly distributed
Social benefits: extent of poverty depends on benefits given
- although in long term with less incentive to work people may stay on benefits
Pensions and age: if pensions lower or non-existent (just relying on state) very little to live on
Ownership of assets: if can afford to invest possibility to make capital gains and increase income and so income gap increases

Question 14

What are the causes of wealth inequality?

Answer 14

Changes in asset prices: when they rise increase wealth of those who own assets
- income earned from this allow them to purchase further assets in future and so widen gap
- also makes it more difficult for low incomes to purchase assets such as house

Inheritance:
- increase in wealth
- means income inequality likely to increase over time until taxes introduced

Income levels:
-higher = more likely to purchase assets and build up wealth

Question 15

What is capitalsim and what is its significance for inequality?

Answer 15

• economic system where resources are allocated through interaction of demand and supply via the price mechanism
• inequality an essential ingredient of capitalism as price mechanism does not consider equality and inequality
• no government to intervene and redistribute income via taxes/benefits or provide min wages
• resources are owned by private individuals
• high levels of inequality provide economic incentives
• although inequality a key ingredient of capitalism could be argued that is has reduced global inequality as higher free trade and growth is allowing more citizens to escape absolute poverty due to greater employment opportunities

Question 16

What is the lewis model?

Answer 16

• argues there is a surplus of labour in rural areas
• ## so workers attracted to city due to wage premium and so higher industrial productivity should create a virtuous cycle of higher profits for firms, higher investment and expansion

Question 17

What is the impact of economic change and development on inequality?

Answer 17

-surplus of labour in rural areas
- so workers attracted to city due to wage premium and so higher industrial productivity should create a virtuous cycle of higher profits for firms, higher investment and expansion
- wages now higher in more productive industrial sector leading to higher income inequality as low productivity agriculture sector wages remain low

• however, over time predicted to fall as gov have significant increase in tax revenue due to development in economy
• so gov can intervene using progressive taxation/providing services
• moreover, as more people absorbed into industrial sector/economic growth more widespread, inequality eventually decreased
• lead to trickle down effect where those on low incomes may be able to gain employment/income

Question 18

What is the Kuznets curve?

Answer 18

• shows economic inequality against income per capita over the course of economic development
• as an economy develops, income inequality first increases then decrease - inverted U-shape
  Criticisms:
• will income inequality rise following industrialisation?:
• countries now have to compete in global market place
• so may find it hard to compete due to an external shock and so businesses may not survive , causing higher unemployment and lower incomes for many who move to the city

will income inequality fall eventually?:
- e.g welfare benefits reduce inequality in the short term, but in the long term reduce incentive to work so may not reduce it
- some argue should just rely on trickle down effect, however may not trickle down enough to reduce inequality

Other factors influence income inequality:
- e,g free market or command

Question 19

What are measures to reduce poverty and inequality?

Answer 19

Taxation:
- more progressive (income inequality)
- reduce regressive taxes (both), e.g cut VAT

Government spending:
- provision of state education, healthcare and infrastructure (*both): enable workers to gain employment and stay in work due to less illness, and improved geographic immobility (EV: time-lag)
- provision of state benefits and pensions (EV: time-lag and opportunity cost)

Direct Controls:
- price controls: e.g max rents
- min (both) and max wages (inequality)

Regulations and Legislation:
- anti-discrimination legislation (both) e.g equal pay improve incomes
- promoting trade unions (both)

Question 20

Evaluation of policies used to reduce poverty and inequality

Answer 20

-cost implications
- Reduced incentives= high unemployment and damage growth
- long term vs short term implications : supply side = time lag
- may have short term benefits but damge incentive long term
- it depends:
- direct controls: set above or below market equilibrium
- education/healthcare: quality/effectiveness
- benefits: magnitude
- Distortion of price signals:
- e.g direct controls can lead to surpluses and shortages
- Poverty and unemployment traps:
- poverty or earnings trap: pay income tax and national insurance at same time as losing welfare benefits
- unemployment trap: better off living on benefits than low wage job paying income tax