Topic 3 - Distribution of Income and Wealth

Question 1

If there are small gaps in income between high and low income earners, what is the general effect on society?

Answer 1

Socieities will tend to have greater happiness, better health outcomes and higher levels of social mobility

Question 2

What is personal income?

Answer 2

Personal income is the amount of money, or other benefits measured in money terms, that flows to individuals or households from the sale of factors of production over a period of time. Forms of income include wages from labour, rent from land, interest from capital, and profit from enterprise

Question 3

What are the 4 forms of income?

Answer 3

Wages from labour
Rent from land
interest from capiital
profit from enterprise

Question 4

What is income inequality?

Answer 4

Income inequality refers to the degree to which income is unevenly distributed among people in the economy. The degree of unevenness can range from a high level of equality, where people receive a similar share of income, to a high level of inequality where there is a large gap between high and low income earners

Question 5

What is mean income?

Answer 5

The average level of income. It is calculated by dividing the total income of a group by the number of income recipients in that group

Question 6

What is median income?

Answer 6

That level of income that divides the income recipients in a group into two halves, one halving incomes above the median and the other half halving incomes below the median. The median is the ‘middle’ income

Question 7

What is the lorenz curve?

Answer 7

The lorenz curve is a graphical representation of income distribution, plotting the cumulative increase in population against the cumulative increase in income. It serves as a graphical representation of the distribution of income or wealth in a population

Question 8

How is the Lorenz Curve constructed?

Answer 8

We construct the Lorenz curve by plotting the cumulative percentage of total income received (vertical axis) against the cumulative percentage of income recipients (horizontal axis) (percentage is the proportion of persons ranked by income) .

Question 9

What would happen on the lorenz curve if income was distributed evenly across the whole population?

Answer 9

The Lorenz curve would just be the diagonal line through the origin of the graph - the line of inequality. This is because if the bottom 20% are earning 20% of the cumulative proportion of total income, and so on, then it is perfect, and this continues to form a diagonal line

Question 10

What is the gini coefficient?

Answer 10

The gini coefficient is a number between zero and one that measures the extent of income inequality in an economy. It is calculated by measuring the degree to which the lorenz curve deviates from the line of equality

Question 11

How is the gini coefficient calculated?

Answer 11

it is calculated as the ratio of the area between the actual lorenz curve and the line of equality and the total area under the line of equality. If looking at the graph in eco notes, the equation is given by A/(A+B)

Question 12

What do the gini coefficient values mean?

Answer 12

The gini coefficient of zero indicates all incomes are equal, and one when a single household receives all the income. The smaller the gini coefficient, the more even the distribution of income

Question 13

What is the trend in Aus gini coefficient

Answer 13

Although Aus has a relatively low gini coefficient, unlike other economies, the Aus gini coefficient has not decreased significantly because we have kind of been ‘capped off’ at our inequality rates

Question 14

What are the sources of income?

Answer 14

Wages from Labour

Rent from land

Earning/Interest from capital

Profit from Entrepreneurship

Transfer payments

Question 15

What are wages as a source of income?

Answer 15

This is the main source of income for consumers. It comes in the form of wage or salary payments for labour when consumers participate in the labour market. It also includes non-wage income such as bonuses, fringe benefits and employer contributions to superannuation. This is referred to as ‘Compensation of employees’, and described as ‘returns to labour’

Question 16

What is rent as a source of income?

Answer 16

Many consumers own land that becomes a source of income when it is rented. For example, consumers may own an investment property that generates rental income. Referred to as the ‘returns to land’

Question 17

What is Earnings/interests as a source of income?

Answer 17

Returns from the ownership of capital (liquid assets) are a significant source of household income. These returns might include earnings from financial assets such as investment funds, superannuation accounts and bank deposits, or the ownership of shares (or whole companies). Because ownership of capital is highly concentrated among the most wealthy households in Aus, a large share of this type of earning goes to the wealthiest households. This is the main way in which inequality in distribution of wealth contributes to inequality in distribution of income.

Question 18

What is profit as a source of income?

Answer 18

A substantial number of Australians are involved in operating businesses, especially small businesses. If the business makes a profit, this income is considered a return for their use of entrepreneurial skill. Profit is the return on entrepreneurship

Question 19

What are transfer payments as a source of income?

Answer 19

Transfer Payments are payments from the government to assist people with basic costs of living. A number of terms are commonly used for transfer payments including: social welfare payments, government benefits, social security, income support and Centrelink payments. Transfer payments are collected through taxation and then transferred from gov to households.

Question 20

What is wealth?

Answer 20

Wealth is the value of the total stock of assets held by individuals at a point in time

Question 21

What is the normal measure of wealth in Aus?

Answer 21

Household net worth

Question 22

What is net worth?

Answer 22

The extent to which the value of household assets (the things they own) such as houses and savings exceeds the value of their liabilities (the things they owe) such as loans

Question 23

What are the main contributors to wealth in Aus? (5)

Answer 23

1. Owner occupied Property
2. Superannuation
3. Investment Property
4. Savings in financial institutions
5. Contents of house

Question 24

What are the major contributors to income in Aus? GIve Percentages.

Answer 24

1. Wages and salary - 56%
2. Returns to enterprise - 10%
3. Business Profits and Capital Investments - 10%
4. Rent from Ownership of housing - 9%
5. Transfer Payments - 8%
6. Other - 7%

Question 25

What are the economic costs of inequality?

Answer 25

Reduces overall utiliity

Reduces economic growth

Creates conspicuous consumption

Creates poverty and social problems

increases the cost of welfare support

Question 26

How does inequality reduce overal utility?

Answer 26

Reduces overall utility- Inequality reduces utility (satisfaction) as people on higher incomes gain less utility from an increase in income than people on lower incomes

This can be explained through the idea of diminishing marginal unity - as more of a good is consumed it will provide progressively less utility to the consumer

Question 27

How does inequality reduce economic growth?

Answer 27

Reduce economic growth- Low income earners have a higher marginal propensity to consume (MPC) as they spend more of each additional dollar they earn than higher income earners. Thus, in economies with high levels of inequality, there is low ocnsumption and high levels of savings –> lower eco activity, employment etc

On top of that, as inequality increases, lower income households are unable to invest in education and lower educational attainment leading to higher UE and lower Labour force participation rate

Question 28

What is conspicuous consumption?

Answer 28

expenditure on or consumption of luxuries on a lavish scale in an attempt to enhance one’s prestige.

Question 29

How does inequality create conspicuous consumption?

Answer 29

Some economists argue that inequality in the distribution of income creates a leisure class consisting of the higher income earners in society

The leisure class puts a large proportion of their money towards conspicuous consumption, which is the consumption of expensive (luxurious) G+S for the purpose of displaying wealth, contributing to a culture where individuals’ sense of their own worth depends on their access to a particular lifestyle

Question 30

How does inequality create poverty and social problems?

Answer 30

Inequality in income distribution causes relative poverty within society

Poverty contributes to the development of an underclass of low income earners, which has limited access to educational opportunities and can suffer health and other disadvantages that may reduce LFPR and create a self-perpetuating cycle of disadvantage

Question 31

How does inequality increase the costs of welfare support?

Answer 31

Govts provide safety net income support for people out of work, the aged and people with disabilities.

Thus, high levels of inequality place increased demands on govt revenue as a larger number of people on low incomes may require govt assistance. This in turn will require higher tax rates to be able to finance these welfare payments

Question 32

What are the social costs of inequality?

Answer 32

Social class divisions

Poverty

Question 33

How does inequality cause social class divisions?

Answer 33

The distribution of income and wealth creates class distinctions in modern economies, such as between groups broadly described as upper, middle and working class

Class divisions can result in tensions between people and between different regions, as well as higher levels of crime and social disorder

These divisions can sometimes lead to social and economic instability, especially in developing economies where the gains of rising prosperity are often unequally distributed

Question 34

What is the difference between absolute poverty and relative poverty?

Answer 34

Absolute poverty is where a person’s income falls below the minimum level to meet basic needs such as food, shelter, clothing, access to clean water etc. Where as relative poverty is the term given to people who are living below a certain income threshold in a particular country.

Question 35

How does inequality cause poverty?

Answer 35

Aus doesn’t suffer from absolute poverty but a high level of relative poverty. This is because inequality fosters a class where people are not able to earn enough. However, Aus gov policies have prevented from absolute poverty from happening (or at least very minimised)

Question 36

What are the economic benefits of inequality

Answer 36

Encourages LF to increase education and skill levels

Encourages the LF to work longer and harder

Makes the LF more mobile

Encourages entrepreneurs to accept risks more readily

Creates the potential for higher savings and capital formation

Question 37

How does inequality encourage an increase in education and skill levels?

Answer 37

If those with higher skills reap higher income rewards, new entrants and existing participants in the LF will be encouraged to improve education and skill levels. Thus some level of income inequality may encourage an increase in the quality of the labour force

Extent of benefits depends on whether poor households can afford access to education. If low income groups cannot, then economy is likely to suffer LT lower levels of productivity growth

Question 38

How does inequality encourage the LF to work longer and harder?

Answer 38

The potential to earn higher incomes produces an incentive for workers to work longer hours or to work overtime, which may enhance eco growth

However, individuals will only work if they feel the extra income is more valuable than leisure time

Question 39

How does inequality make the LF more mobile?

Answer 39

Higher incomes can act as an incentive to encourage labour to move (physically) to where it is most needed

A more mobile LF will lead to a more efficient allocation of resources and higher eco growth

Question 40

How does inequality make entrepreneurs accept risk more readily?

Answer 40

Due to prospect of considerable income rewards, leading to new investment and innovation. If entrepreneurs received no extra reward for risk-taking, there would be fewer entrepreneurs and businesses, lower eco growth and reduced productive capacity in the economy

Question 41

How does inequality create the potential for higher savings and capital formation?

Answer 41

The higher the income, the greater the proportion of income that will be saved and vice versa. Theoretically, greater income inequality should encourage increased savings in the economy because of the greater number of higher income earners. Increased savings should reduce Aus’s reliance upon foreign capital by providing domestic funds for investment

Question 42

What are the social benefits of inequality?

Answer 42

Larger pie for all members of society to benefit from - since inequality makes labour more productive and increases savings, all individuals can benefit from increased GDP and incomes

Increased philanthropy within society to help the more disadvantaged

Question 43

Which groups are discussed when it comes to ‘dimensions of trends according to…’

Answer 43

Gender, Age, occupation, ethnic background, and family structure

Question 44

WHat is the general trend in inequality in Aus?

Answer 44

Aus has experienced an increase in overall levels of inequality slightly

Question 45

What is the general trend regarding age and education?

Answer 45

Those who are older earn more, peaking at around 35-54 years old, before decreasing slightly for older people, but teenagers have the highest level of income inequality in terms of age

People with a postgrad degree or even a level of tertiary education have higher paying jobs than people who dont

Question 46

What is the general trend regarding income inequality for gender?

Answer 46

Generally, full time female workers earn less than males. This is largely due to past attitudes concerning the role of women in society, where females had fewer opportunities to acquire education, skills and qualifications

Question 47

What is the general trend regarding income inequality for occupations?

Answer 47

financial services earn the majority of income, whereas people in the hospitality industry earn less (i.e. an income inequality between occupations)

Question 48

WHat is the general trend in income inequality for people of different ethnic and cultural backgrounds?

Answer 48

Australians with a migrant background tend to have higher incomes if they come from English speaking countries, and lower incomes if they come from non English speaking backgrounds.

Question 49

What is the general trend in income inequality for various family structures?

Answer 49

One person households and single parent households receive the lowest weekly incomes, below the median, whereas couples without dependent children were the highest income family structure

Question 50

What is the general trend in income inequality for various geographies?

Answer 50

ACT and NT enjoy the highest household incomes, while Tasmania has the lowest incomes