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[OBSELETE] S - Econ > the distribution of income > Flashcards

the distribution of income Flashcards

1
Q

what is wealth

A

a stock of assets owned by an individual, firm or country
examples of wealth
- houses
- shares
- buildings
- land

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2
Q

what is income

A

income is a flow of money going to factors of production (wages/ salary is going to labour, rent is income going to land)
income may be earned through (through employment) or unearned

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3
Q

what is meant by the distributon of income

A

means how income is divided between different groups in society

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4
Q

what is the distribution of wealth

A

how wealth is divided between different groups in society

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5
Q

what is the link between income and wealth for the rich

A

virtuous circle

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6
Q

what is the link between income and wealth for the poor

A

vicious circle

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7
Q

explain the virtuous circle for the rich

A

if you have a high income you are more likely to have money left over after living costs
you can invest this and thereby gain interest

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8
Q

explain the vicious cycle for the poor

A

if you are poor, have no saving and a low income, you are likely to end up borrowing money
repaying a loan with interest, makes it even harder to save or cover living costs

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9
Q

what are the factors influencing distribution of wealth and income

A

when an economy grows rapidly the gap can become wider
although everyone is becoming richer in absolute terms, the rich gets richer more quickly than the poor gets richer

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10
Q

recall the factors influencing distribution of income

A

wage/ salary differentials
market structures
govt policy
age
household consumption
globalisation and migrations of workers
inequality in levels of wealth
high levels of education
factors of production
skills and qualifications

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11
Q

how does factors of production affect the distribution of income

A

earning from labour have not risen as fast as earning from land and entrepreneurship widening the gap wages haven’t risen as much as land owners earning from rent

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12
Q

how does earned vs unearned income affect the distribution of income

A

income is not one homogeneous item and the factors determining wage inequality are different from the factors determining differences in unearned income
unearned income tends to go hand in hand with wealth

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13
Q

how does wage differentials affect the distribution of income

A

differential here means the difference between top-earners and bottom earners

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14
Q

how does globalisation and migration of workers affect the distribution of income

A

the freer movement of goods and labour have arguably widened the gap between rich and poor
lower paid workers in industries such as manufacturing or call centres are aware that they are in competition now with cheap labour in other exerting a downward pressure on their wages
by contract executive justifying their high salaries through international comparison, suggesting that they will move abroad if they are not paid a competitive rate for their skills

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15
Q

what are the four components to an individuals total net worth, stated by the office for national statistcs

A

net property wealth (your house)
net financial wealth (your cash)
physical wealth (your car)
private pension wealth (your pension)
the relative size of each of these elements varies greater when you compare rich and poor

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16
Q

what are the factors influencing the distribution of wealth

A

propensity to save
government policy
private pensions
capital gains
inheritance traditions
inequality of wealth
inequality of income
gifts and luck
skills and qualifications

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17
Q

what is the private pension assets and how does it affect the distribution of wealth

A

pension pension assets accounted for 37% of total household wealth equalling the proportion of wealth from property in 2010-2012
the poor have not traditionally had private pensions, either through lack of access to workplace schemes or lack of spare cash to invest
state pensions arent included as you dont have a lump sum rather count as a flow concept giving a monthly income
the automatic enrolment of workers into employers pension schemes is a policy introduced to address this

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18
Q

how does inheritance, gifts and luck affect distribution of income

A

wealth distribution is in part accounted for by ‘accidents of birth’ and luck
old money is a label that refers to money that has been inherited/passed down rather than earned
new money refers to wealth generated by entrepreneurs and others who got lucky, take risks that pay off or win the lottery
so having old wealth can improve your chances of generating new wealth

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19
Q

how does taxation affect the distribution of income

A

both income and wealth can be and are taxed
in the UK the greater part of tax revenue comes from taxation on income than on wealth
even where is taxed the wealthiest are often able to avoid losing too much of their wealth because they have the means to employ clever accountants who know the loopholes

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20
Q

what are the consequences of wealth inequality

A

some may have to live in low quality homes or move house frequently
asset bubbles and property speculation
the hinderance of social mobility via the wealthy affording better education, health, cultural goods
child poverty and pensioner poverty
wealth creates incomes via interest, rent and dividends , causing more income inequality
can be argued that only the wealthy can afford to take big risks as entrepreneurs so have access to high risk/ reward opportunities
envy and jealousy leading to social problems
intergenerational inequality arising from property inequality

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21
Q

what are the consequences of income inequality

A

a sense of unfairness
impact on aggregate demand, economic growth and performance
impact on social indicators such as crime, education, physical health, mental health

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22
Q

recall the policies being used by UK govt to combat the uneven distribution of income

A

inheritance tax
income tax
capital gains tax
national insurance
restrictions on second homes
mansion tax
forcing independent schools to charge VAT

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23
Q

why might wealth and income inequality be desirable

A

theres an argument that some degree of income and wealth inequality is inevitable in a market economy and perhaps desirable as it may provide incentives and allocate resources effectively

24
Q

what is the trickle down effect

A

wealth and income inequality can be seen as a not so serious issues because of the trickle down effect
the belief that if high income earners gain an increase in salary, then everyone in the economy will benefit as their increased income and wealth filter through to all sections in society

25
Q

what happens if the richest gain an increase in wealth

A

extra wealth will cause an increased demand for goods and services causing higher employment and rise in wages
higher wages - multiplier effect
or they may invest their increased wealth in new businesses which will create new jobs and increase incomes of those employed
higher spending and investment will stimulate economic activity leading to a rise in tax revenues which can fund healthcare, education and welfare payments to the poor

26
Q

what are the criticisms of the trickle down effect

A

the wealthy have a high marginal propensity to save
wealth has been saved in off shore accounts to avoid paying tax

27
Q

why has the distribution of income become more unequal in the uk

A

cutting top rates of tax (supply-side policy - the economy will grow faster)
conservatives more likely to accept higher inequality
privatisation and rise of executive pay
fall in real value of benefits
increase in % of single parent families
increase in part time jobs

28
Q

what causes inequality of income between households

A

wealth inequality
household composition
level of skills and qualifications
differences in earnings

29
Q

why are there differences between income of regions

A

industrial structure
unemployment rates
% of population on benefits
educational standards
resource endowment

30
Q

why may unequal distribution of income be good

A

wealthier people are likely to stay in the country and contribute
higher GDP
motivation for promotions - increasing MRP
more entrepreneurs- new products
take on extra work more regularly
govt gets more tax revenue

31
Q

why may unequal distribution of income be bad

A

can lead to social problems such as:
resentment
robbery
riots

32
Q

what are the causes of poverty

A

low levels of income
unemployment
dependency of others
age
govt policy - wealth creation and trickle down effect
low levels of education and training
country and/or region of residence
family backgrund
ill-health

33
Q

what are the effects of poverty

A

ill-health (including stress and mental health illness)
limited education and training an thus poor job prospects
lower productivity (for individual/economy) - lower MRP
poorer lifestyle

34
Q

what policies can you think to reduce income/ wealth inequality and poverty

A

welfare benefits
subsidised government services (benefits in kind)
progressive taxation
national minimum wage/ national living wage
reduce unemployment
encourage equality of opportunities in education and jobs
legislation to protect the lowest paid workers
switch to mean tested benefits
decrease or increase in real value welfare benefits

35
Q

what are the pros of national minimum wage

A

boost low wages
empowers the economically weak (especially against monopsonist)
upward multiplier (AD)
increase the labour supply
increase the demand for labour

36
Q

what are the negative effects of the national minimum wage to reduce income inequality

A

increase in the costs of production (anti supply side policy)
more unemployment
downward multiplier
therefore reduce the demand for labour
disequilibrium and so increased unemployment

37
Q

how can you evaluate the use of the national minimum wage to reduce income inequality

A

effect of unemployment is dependent on elasticity of demand and supply of labour

38
Q

what is the pros of cutting the bottom rate of tax to reduce income inequality

A

reduce the poverty trap
reduce benefit dependency
increase the supply of labour
upward multiplier
increase income for ow paid
cheap to administer

39
Q

what are the cons of cutting the bottom rate of tax to reduce income inequality

A

disincentivising productivity (greater returns for less MRP)
progressive tax system is fair but does it lead to as much efficiency as flat rate or regressiv taxes
may have to increase tax elsewhere to fund

40
Q

what are the pros of funding education and training to reduce income inequality

A

reduction in structural unemployment
increases MRP
reduces exploitation and discrimination
increase social mobility
increase labour occupational mobility
supply side policy
reduces costs of production

41
Q

what are the cons of funding training and education to reduce income inequality

A

uncertain outcomes
expensive
opportunities cost
time lags

42
Q

what are the pros of the trickle down effect to reduce income inequality

A

wealthy economies have less absolute poverty
entrepreneurs will invest and increase GDP
entrepreneurs demand labour and so create jobs
more emlpoyment will increase the scarcity of labour and so wages will rise

43
Q

what are the cons of the trickle down effect to reduce income inequality

A

increases in real GDP are disproportionately taken by the wealthy
increasing disparity between high and low incomes

44
Q

what are the pros of increasing benefits to reduce income inequality

A

increase income for those on low incomes
means tested gets to the most needy
stops absolute poverty
reduces relative poverty

45
Q

what are the cons of increasing benefits to reduce income inequality

A

incentive to not work
reduce labour supply
people may get into poverty trap
expensive
people cheat the system
means tested so its beureacratic

46
Q

what are the benefits of using tax credits to reduce poverty

A

increases income of low income earners
people are still encouraged to work

47
Q

what are the cons of using tax credits to reduce poverty

A

disincentivises higher wages as you may lose tax credit
earning and losing tax credit seems like a huge increase in tax
could reduce MRP

48
Q

how may free market economists view interventions by the govt to reduce poverty

A

they believe intervention is pointless in the long as its all about scarcity
so to increase low wages you need to make labour scarce
to do this - need a high demand for labour and for this you need to have free markets that exploit low wages
as labour gets more expensive businesses will switch to capital and create unemployment

49
Q

what other measures could be used to reduce income inequality

A

reduce unemployment
expenditure to encourage equality of opportunities in education and jobs
subsidised govt services
spending on social funds

50
Q

what are cash benefits

A

universal child benefits
state pensions
conditional benefits
means tested welfare payments

51
Q

what are in kind benefits

A

education
healthcare
social housing
employment training

52
Q

what are the problems with taxation systems

A

fiscal drag - when raises in tax thresholds in progressive tax systems dont keep pace with inflation

53
Q

what is the effect of fiscal drag

A

if wages prices and tax thresholds all rise at the same rate then your income in real terms remains the same
however tax threshold arent linked to inflation rates so if the tax threshold doesnt increase you end up paying a higher proportion in tax and so becoming relatively poorer

54
Q

what is a poverty trap

A

where more working results in little increase in net income
as earnings trap occurs where a persons income level is such that they become eligible to pay income tax but lose means tested benefits
this can result in a marginal tax rate of 70%

55
Q

what is an unemployment trap

A

where working results in little increase in net income
applies to those not in work who believe that they will lose more if they work
both earning and unemployment trap are complicated by the black economy, where people dont declare income so that they can continue to claim benefits

[OBSELETE] S - Econ (42 decks)

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