Pack 6 Macro Flashcards
What is absolute poverty?
measures the number of people who are unable to afford basic needs necessary to survive, e.g food and shelter
What is relative poverty?
measures the number of people living below a certain (average) income threshold in a country
What are the two methods for measuring absolute poverty?
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
What are the measures used to measure relative poverty?
- 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
What are the non-income measures of poverty?
- use life expectancy, malnourishment and access to clean water
- can be combined into composite indicators , such as the the World Banks Multidimensional Poverty Measures
What are the causes of absolute and relative poverty?
- 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
What factors cause changes in absolute and relative poverty?
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
What is income inequality?
unequal distribution of household or individual income across the various participants in an economy
What is wealth inequality?
unequal distribution of household/individual wealth (value of assets)
What are the two ways to measure income inequality?
Lorenz curve
Gino co-efficient
What is the lorenz curve and what do shifts in it represent?
- 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
What is the Gino Co-efficient?
- 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
What are the causes of income inequality?
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
What are the causes of wealth inequality?
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
What is capitalsim and what is its significance for inequality?
- 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