The distribution of income and wealth Poverty and Inequality

Question 1

Income

Answer 1

Is a flow concept. Measures the amount of money an individual gains over a period of time.

Question 2

Causes of unequal income

Answer 2

• wage differentials
• skills/human capital
• geographical location
• discrimination
• dividends
• employment
• geographical/occupational immobility
• entitlement to cash benefits/state incomes
• inequality of opportunity
• income generated by wealth
• taxation policy

Question 3

Wealth

Answer 3

A stock concept. Measured at a given point in time. Assets constitute wealth. Assets = goods/services w/ market value that generates income over time such as pensions.

Question 4

Causes of unequal wealth

Answer 4

• inheritance
• asset prices increasing consistently greater than incomes
• luck
• private pensions
• income differentials
• personal decisions/lifestyle choices.

Question 5

Equality

Answer 5

Equality means each individual or group of people is given the same resources or opportunities.

Question 6

Equity

Answer 6

Equity means fairness in the overall distribution of income and wealth. Is subjective and involves making a value judgement.

Question 7

Horizontal equity

Answer 7

Horizontal equity is an economic theory that states that individuals with similar income and assets should pay the same amount in taxes. Horizontal equity should apply to individuals considered equal regardless of the tax system in place. The equal treatment of equals.

Question 8

Vertical equity

Answer 8

Vertical equity is a method of collecting income tax in which the taxes paid increase with the amount of earned income. The driving principle behind vertical equity is that those who have the ability to pay more taxes should contribute more than those who are not. Unequal treatment of unequal’s.

Question 9

Relative poverty

Answer 9

A level of household income that is considerably lower than the median level of income within a country
The official UK relative poverty line is household disposable income (adjusted for household size) of less than 60% of median income

Question 10

Absolute poverty

Answer 10

When a household does not have sufficient income to sustain even a basic acceptable standard of living / meet basic needs
Absolute poverty thresholds will vary between developed and developing countries
The extreme poverty measure now used by the World Bank is the percentage of the population living on less than $1.90 a day (PPP)

Question 11

The official poverty line

Answer 11

An income level that is considered minimally sufficient to sustain a family in terms of food, housing, clothing, medical needs, and so on.

Question 12

Trickle down effect

Answer 12

Trickle down economics is a term used to describe 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.

Question 13

Causes of poverty

Answer 13

• low income
• low wealth
• Hysteresis
• Poverty trap
• unemployment trap
• fiscal drag

Question 14

Lorenz curve

Answer 14

A measure of inequality, plots the cumulative share of total income against the cumulative share of the population.

Question 15

Gini coefficient

Answer 15

Numerical measure of inequality. Area a/Area a+b. Smaller = less inequality. 0 = perfect equality. 1 = perfect inequality.

Question 16

Benefits of inequality

Answer 16

• incentive to improve skills and get employed
• incentivises entrepreneurship

Question 17

Costs of inequality

Answer 17

• low incomes
• costs to the government
• government as a monopsonist employer

Question 18

Policies to solve inequality

Answer 18

• Tax adjustments
• Universal benefits system
• Increase work incentives
• national minimum wage/living wage
• stimulate growth
• state provision