Theme 4 CC7 -Inequality and poverty Flashcards
What is the distinction between income and wealth?
Income is a flow of money measured over a period of time
Wealth is a stock of assets measured at a point in time
What is the distinction between inequity and inequality?
Inequity - Unfair distribution of income (Normative)
Inequality - Unequal distribution of income e.g. different levels of income (Objective)
How does housing market create unequal distribution of wealth
People with higher incomes buy more expensive houses, then as house prices rise, the inequality increases between home and non-home owners.
Why is it easier for wealthy individuals to increase wealth compared to poor?
-Assets appreciate in value.
- Wealthy have more resources to invest, earn dividends/rent etc
- Poor lack assets and income to acquire assets
- Spend large percentage of income on necessities
Why could it be argued inequality is fair?
Why is inequality essential for the economy?
Those with higher incomes may work harder and therefore deserve what they earn?
- Encourages low income earners to work harder/earn more increasing productivity, output and growth.
- Incentivises those in education to get degrees to become skilled workers which benefits the economy.
What problems could arise from high levels of inequality ?
- Detrimental to the poor
- Fall in govt tax revenues, furthermore high income earners may get taxed more.
- Fall in consumption (poor will only buy necessities), fall in AD/growth
- ^Crime and violence, leads to ^spending on policing. Negative externality - reduced quality of life due to crime
- Poor health and education (e.g. dropouts, drugs/smoking, teen pregnancies)
Describe the Lorenz curve
A graphical representation of the degree of income or wealth inequality in a society.
- 45 degree line shows total equality
- The further the lorenz curve is from straight line, the greater the income inequality in society.
Explain gini coefficient
a statistical measure of inequality.
- Ranges from 0 (perfect equality of income) to 1 (income highly unequal - 1 person having all income)
- Gini index is gini coefficient x100
What percentage of median income is defined as the ‘poverty line’ in the UK?
What is the poverty line?
60%
- the minimum level of income deemed necessary to achieve an adequate standard of living in a given country
Give 3 causes of wealth and income inequality within countries
- Wages: higher skilled jobs often have higher incomes, compared to low skilled jobs. Or some people work much greater hours and others are unemployed (Benefits or pensioners). Moreover, the higher the level of income, the more wealth they can build up (^stock of assets)
- Wealth: Someone who has a high level of wealth (Either through inheritance or savings) is able to build up larger wealth on riskier investments with high rates of return. Also, by owning assets, prices rising ^one’s wealth therefore if someone owns more assets, their wealth will rise more as prices rise.
- Age: Working adults at peak of career will have a higher income than those who have just started. Those older, have had longer time and a greater chance to build up assets.
Explain why there is income/wealth inequality between countries
Some countries have been held back by wars, droughts, famines and earthquakes. Certain social groups may have been excluded and marginalised.
Developed countries tend to favour each other when trading, negotiating etc. and this helps them to develop more than countries who are not involved in the agreements.
- Developed countries have higher incomes than developing countries e.g. china are a low wage economy
What is the impact of economic change and development on inequality?
The Kuznets hypothesis says that as society develops and moves from agriculture to industry, inequality increases as the wages of industrial workers rises faster than farmers. Then, wealth is redistributed through taxation and government spending and so inequality falls.
Why is inequality essential in capitalism?
- Creates incentives for people to work hard, to study, take risks and innovate. This can ^productivity and LT Economic growth.
Why is inequality inevitable for economic growth?
- There is an unequal distribution of income in the labour market. There is an unequal ownership of assets. This creates inequality of wealth & income.
- It could be argued that inheritnace makes this inevitable.
- Also as economies grow, High income earners wages rise whereas low income earners rise less/unemployed are indifferent, therefore inequality increases.
Evaluate inequality as a threat to capitalism/growth
- High inequality is highly correlated with poor health and educational attainment. This can reduce productivity and economic growth.
- If there is a large % of the population with low income, there will be less consumption, Less AD and less economic growth.
- A certain degree of inequality is inevitable. However, govts can follow policies to reduce inequality.
