Theme 4.2 : Inequality, and poverty

Question 1

Definition of absolute poverty

Answer 1

Incomes below a threshold ($2 a day) to access the most basic, life sustaining goods/services

Question 2

Definition of relative poverty

Answer 2

Incomes below a given average in society

Question 3

Difference between equality and equity

Answer 3

Equity - Fair distribution of income
Equality - Equal distribution of income

Question 4

7 causes of poverty

Answer 4

-Unemployment - cyclical and structural
-Poor education/skills
-Poor health
-Wage differentials
-Born into poverty/raised by single parent
-Tax cuts for well off
-Subsistence agriculture

Question 5

Difference between income and wealth

Answer 5

Income - Flow measured over a given time
Wealth - Stock concept, assets with market value that can generate income

Question 6

Reasons for wage differentials

Answer 6

Age - Wealth accumulated over time. Incomes increase so does wealth
Education (distribution of income)
Ownership of financial assets
Ownership of property

Question 7

How to calculate the Gini coefficient

Answer 7

Section A / Section A+B

Section A is area between line of perfect equality and Lorenz curve
Section B is area below the Lorenz curve

0 = perfect equality
1 = Perfect inequality

Question 8

Explain the Lorenz curve

Answer 8

The closer the curve is to the line of perfect equality, the more equal the distribution is

Question 9

6 policies to redistribute income/wealth

Answer 9

• Taxation
• Benefits
• Min / max wage
• Legislation
• Gov spending on education training
• Gov spending on healthcare

Question 10

MICRO causes of income inequality

Answer 10

-Age
-Education
-Technology
Inheritance
Flexible labour contracts
-Capital intensive production

Question 11

MICRO consequences of income inequality

Answer 11

-Social costs
-Incentive to be educated
-Incentive for entrepreneurship
-Incentive to work

Question 12

MACRO causes of income inequality

Answer 12

-One sector dominance
-Recession - Low skill and younger workers are first to be made redundant as they have low marginal revenue product (MRP)
-Globalisation - TRADE - Comparative advantage can lead to industry decline
-Government policies/corrupt government

Question 13

MACRO consequences of income inequality

Answer 13

-Worsens government finances
-Living standards decrease
-Asset bubbles
-Less economic growth

Question 14

MACRO Policies to reduce income inequality

Answer 14

-Progressive income tax
-Gov spending on welfare
-Gov spending on education
-Universal basic income/benefits

Question 15

MICRO policies to reduce income inequality

Answer 15

-Minimum wage
-Maximum wage

Question 16

Explain the Laffer curve

Answer 16

-Bell shape
-Optimal tax rate is T*
-Increasing taxes will increase tax revenue up to a certain point
-Increasing taxes beyond the efficient tax rate (T*) will see a reduction in tax revenue for 3 reasons;
-Disincentivises people to work harder - Less productivity as lots of income will be taxed away
-Emigration - People move to countries with lower tax rates - High earners may leave
-Tax evasion/Tax avoidance - Both reduce tax revenue, evasion is illegal but avoidance is legal, higher tax rate makes evasion more likely

Question 17

Explain the poverty growth cycle

Answer 17

1) Low incomes
2) Low levels of savings
3) Low levels of investment
4)Low economic growth

Question 18

Explain the development poverty cycle

Answer 18

1) Low incomes
2) Low levels of production
3) Low levels of human capital
4) Low productivity