The distribution of income and wealth: poverty and inequality Flashcards
Things to know for exam:
- Difference between income and wealth
- Factors influencing distribution of income and wealth
- Difference between equality and equity - in relation to the distribution of income and wealth
- The Lorenz curve and Gini coefficient
- Likely benefits and costs of more equal and more unequal distributions
- Difference between relative and absolute poverty
- The causes and effects of poverty
- Policies which are available to influence the distribution of income and wealth and to alleviate poverty
- The economic consequences of such policies
What is income
A flow of money to a factor of production, usually labour - wages, salaries, dividend, interest from savings
What is wealth
A stock of valuable assets such as property or shares - property, shares, savings, cash, art, wine
Factors leading to an unequal distribution of income
- Difference in skills, qualifications and work experience
- Difference in wealth
- Impact of the state - free market vs command market
Factors leading to an unequal distribution of wealth
- Difference in income - saving and earning interest
- Inheritance
- Marriage
- Property
Equality vs equity
Equality = income and wealth shared equally between members of society
Equity = notion of fairness
How is inequality measured?
The Lorenz curve and the Gini coefficient
The Lorenz curve
Measures and illustrates the extent of income and wealth inequality
- The further away the curve is from the 45 degree line of perfect equality, the greater the inequality
The Gini coefficient
A statistical measure of the degree of inequality - the ratio of the area between the 45 degree line and the Lorenz curve divided by the total area below the 45 degree line
A/(A+B)
- The higher the value - the more inequality
- Perfect equality = Gini coefficient of 0
- Perfect inequality = Gini coefficient of 1
Possible costs of income and wealth inequality
- Social tensions - porter people resent richer - could lead to crime and rioting
- Creation of an ‘underclass’ - segment of society reliant on welfare benefits
Possible benefits of income and wealth inequality
- Incentive effects - possibility of many people earning high salaries or profits through entrepreneurship - help to generate economic growth making average incomes higher
- TRICKLE DOWN - free market view that poorer members of society who will benefit from high earners and the relatively wealthy e.g. through job opportunities and helping to fund merit goods
- Higher earners may also pay higher taxes that can be redistributed
What is relative poverty?
Some people in society are worse off than others - e.g. earning less than 60% of a countries median income
What is absolute poverty?
Some people can’t afford the basic necessities to sustain life
Causes of poverty
- Relatively low wages
- Unemployment
- Regressive taxation
- Old age
- Imperfect information - unaware of eligibility to claim certain welfare benefits
Effects of poverty
- Greater demands on the welfare system
- Poor educational attainment - lower MRP (marginal revenue productivity) than those with higher attainment
- Poor health - higher incidence of chronic illness
Policies to influence the distribution of income and wealth and to alleviate poverty
- Progressive taxes - higher earners pay a large %
- NMW - to prevent employers exploiting those in relatively lower skilled occupations
- Welfare benefits
- Education and training - helps to increase the MRP of the labour force
- Reducing unemployment
- Promoting trickle down
Possible consequences of progressive taxation to alleviate poverty
- Can create disincentives to work - voluntary unemployment - slower economic growth - reduced income tax revenues overall
- May create disincentives to invest and be entrepreneurial
- Higher taxes may encourage a ‘brain drain’ as high earners move overseas to low tax countries
Possible consequences of the NMW
- Unemployment if too high - increasing won’t benefit those already unemployed
Possible consequences of welfare benefits
- Increasing may increase the replacement ratio and reduce incentives to work - means-testing benefits arguably better than universal benefits
Possible consequences of education and training
May tak ea while to feel positive impacts - many courses are expensive
Possible consequences of reducing unemployment
- Expansionary fiscal and monetary policies have a time lag - may lead to demand pull inflation
Argument against ‘trickle-down’
- Critics argue it doesn’t work - the highest earners in society can afford tax accountants to help exploit loopholes to miniseries the tax they pay
