The distribution of income and wealth: poverty and inequality

Question 1

Things to know for exam:

Answer 1

• 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

Question 2

What is income

Answer 2

A flow of money to a factor of production, usually labour - wages, salaries, dividend, interest from savings

Question 3

What is wealth

Answer 3

A stock of valuable assets such as property or shares - property, shares, savings, cash, art, wine

Question 4

Factors leading to an unequal distribution of income

Answer 4

• Difference in skills, qualifications and work experience
• Difference in wealth
• Impact of the state - free market vs command market

Question 5

Factors leading to an unequal distribution of wealth

Answer 5

• Difference in income - saving and earning interest
• Inheritance
• Marriage
• Property

Question 6

Equality vs equity

Answer 6

Equality = income and wealth shared equally between members of society

Equity = notion of fairness

Question 7

How is inequality measured?

Answer 7

The Lorenz curve and the Gini coefficient

Question 8

The Lorenz curve

Answer 8

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

Question 9

The Gini coefficient

Answer 9

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

Question 10

Possible costs of income and wealth inequality

Answer 10

• Social tensions - porter people resent richer - could lead to crime and rioting
• Creation of an ‘underclass’ - segment of society reliant on welfare benefits

Question 11

Possible benefits of income and wealth inequality

Answer 11

• 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

Question 12

What is relative poverty?

Answer 12

Some people in society are worse off than others - e.g. earning less than 60% of a countries median income

Question 13

What is absolute poverty?

Answer 13

Some people can’t afford the basic necessities to sustain life

Question 14

Causes of poverty

Answer 14

• Relatively low wages
• Unemployment
• Regressive taxation
• Old age
• Imperfect information - unaware of eligibility to claim certain welfare benefits

Question 15

Effects of poverty

Answer 15

• 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

Question 16

Policies to influence the distribution of income and wealth and to alleviate poverty

Answer 16

• 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

Question 17

Possible consequences of progressive taxation to alleviate poverty

Answer 17

• 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

Question 18

Possible consequences of the NMW

Answer 18

• Unemployment if too high - increasing won’t benefit those already unemployed

Question 19

Possible consequences of welfare benefits

Answer 19

• Increasing may increase the replacement ratio and reduce incentives to work - means-testing benefits arguably better than universal benefits

Question 20

Possible consequences of education and training

Answer 20

May tak ea while to feel positive impacts - many courses are expensive

Question 21

Possible consequences of reducing unemployment

Answer 21

• Expansionary fiscal and monetary policies have a time lag - may lead to demand pull inflation

Question 22

Argument against ‘trickle-down’

Answer 22

• 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