unit 2 AOS 2

Question 1

factor income

Answer 1

*Arise due to the result of productive activity

*Paid to factors of production

*Included in national income estimates + e.g.: rent, wages, interest, profits

Question 2

transfer receipts

Answer 2

• Do not arise due to any productive activity
• Not paid to factors of production
• Excluded from national income estimates

*e.g. : scholarships to students, old age pension, lotteries, remittances received from abroad

Question 3

types of income (private/market income)

Answer 3

income that is received in the market place primarily as a result of individual making a contribution to the production process (factor income). Such as wages, salaries, interest and dividends.

Question 4

types of income (gross income)

Answer 4

Private or market income plus direct cash benefits received from governments such as pensions, family tax benefits and job search allowance.

Question 5

types of income (disposable income)

Answer 5

gross income less the direct taxes levied by governments (personal income tax)

Question 6

types of income (social wage income)

Answer 6

disposable income plus indirect government benefits provided in the form of goods and services (e.g.
education & health)

Question 7

types of income (final income)

Answer 7

social wage income less production or indirect taxes.

Question 8

types of income (discretionary income)

Answer 8

the income available for consumption on goods and services following the payment of unavoidable expenses (mortgage, rent, direct)

Question 9

types of income (equivalized household income)

Answer 9

Disposable income of a household adjusted to take into account the size and composition of the household

Question 10

wealth

Answer 10

• consists of assets owned by private individuals (e.g. houses, shares, bonds, savings)
• As income rises—> more money left over after essential consumption
• This money can be saved and invested
• Most of this investments grow in size over time —> increasing wealth (and potentially income)
• The cycle then continues year on year and the wealth gap gets larger
• This wealth is then usually handed down through generations which further adds to the gap

Question 11

nominal income

Answer 11

• is the number of dollars of income received by an individual measured over a period of time, and does not take into account its purchasing power and inflation

Question 12

real income

Answer 12

• is equal to a person’s nominal level of income after accounting for the impact of changes in the general price level (inflation). This is a guide to its purchasing power

Question 13

equity

Answer 13

• Equity is more related to fairness (fair)

Question 14

equality

Answer 14

• Equality mean that everyone would have equal access to good, services and incomes. (Even)

Question 15

income

Answer 15

total income that have been earned by those who have contributed to the production of the good and service produced

Question 16

production

Answer 16

the total value of goods and services that are produced in the economy

Question 17

expenditure

Answer 17

the total spending undertaken on the good and services being produced

Question 18

inflation (nominal vs real)

Answer 18

• Inflation > rise in nominal income = fall in real income
• Inflation < rise in nominal income = rise in real income
• Inflation = rise in nominal income = no change in real income

Question 19

Equitable

Answer 19

sufficient income to purchase or access basic goods and services

and enjoy reasonable living standards at a level deemed generally acceptable to society.

Question 20

difference between factor income and transfer receipts

Answer 20

The difference between Fl and TR is whether or not the income being received is for rendering a productive service.

Payment received in exchange
for service = often referred
to as earned income)

Payment received without
providing a service = TR
* Gifts, subsidies, donations, scholarships (unilateral payment)

Question 21

why is equity important

Answer 21

• In our capitalist economy it is essential that we pursue equity rather than equality to give people the motivation to work hard and improve efficiency

Question 22

absolute poverty

Answer 22

refers to people living in a situation Where they have insufficient income to purchase the basic goods and services such as food, shelter and clothing.

Question 23

Henderson poverty line

Answer 23

• Henderson adopted a poverty line equal to the basic wage for a family of two adults and two dependent children where the head of the household was working. This became the reference benchmark poverty line.
• Government uses the line to determine changes needed to welfare benefits.
• The relative poverty line income currently is $1,091.50 per week.

Question 24

relative poverty

Answer 24

exists when a household have low incomes compared with what is needed to maintain a agreed reasonable living standards (measured by Henderson poverty line).

Question 25

dignified standard of living

Answer 25

‘Dignified standard of living’ refers to household being able to afford the goods and services that allow them to live in our affluent and modern society with some ‘dignity’ and ‘self respect’.

Question 26

effect of poverty on living standards (material living standards)

Answer 26

• Poverty impacts the health and education of those family members living in poverty.
• Households living in poverty are less likely to have the financial means to support a healthy diet, visit medical professionals or pay for needed medicines.

Question 27

effect of poverty on living standards (non-material living standards)

Answer 27

• Poverty leads to lower to poor physical and mental health.
• In turn, the poor outcomes impact the ability to earn incomes and have better material standards in the future.
• An increase in social unrest or anti-social behavior.
• The development of a class system in society and a growing sense of ‘us’ and ‘them

Question 28

what does the Henderson poverty line imply

Answer 28

Henderson poverty line will rise over time as the nation’s income and wealth increases.

When a household income falls below the ‘Henderson poverty line, it means that they are earning a level of income that is insufficient to provide the members of that household with a ‘dignified standard of living’.

Question 29

lorenz curve

Answer 29

*Lorenz curve is the diagrammatical representation of the degree of equality in the distribution of income or wealth.

• Lorenz curve plots the percentage share of total income earned on the y axis against each quintile on the x-axis.
• A perfectly straight line on a 45 degree angle represents absolute equality
• The further the curve moves away from the 45 degree line the greater the inequality in income

Question 30

what income is used to measure income inequality

Answer 30

*Gross household income

*Household disposable income

*Equivalized household income

this information is then ranked from lowest earning households to the highest earning households and placed in quintiles

Question 31

line of absolute equality

Answer 31

The line of absolute equality is a hypothetical example of Lorenz curve where each quintile earns exactly the same share of total income. It is also referred to as the 45 degree line.

Question 32

Gini coefficient

Answer 32

• A number between zero and one which provides an indicator of the degree of inequality in the distribution of income.
• It is determined by comparing the area between the Lorenz curve and the line of absolute equality and the total area under the line of equality
• Gini coefficient= Area A/Area A + B
• Zero= total equality
• One = total inequality

Question 33

main income the ABS uses to measure income inequality

Answer 33

When measuring the changes in the distribution of the income and the spending power of households over time, the ABS most relies on the measure of equivalised household disposable income.

Question 34

causes of income inequality and poverty in Australia- quality of human capital

Answer 34

the difference in skills, talent or ability that are held by members of the workforce

Question 35

low supply for labour

Answer 35

highest wages received by those who supply their labour to market where supply of labour is low relative to demand.

eg. talents (actors, artist athletes)
risk takers (entrepreneurs )
high education (doctors, lawyers)

Question 36

high supply for labour

Answer 36

relatively low wages received by those who supply their labour to market where supply of labour is high relative to demand.

Question 37

causes of income inequality and poverty in Australia-unemployment

Answer 37

unemployment refers to the number of people who are actively seeking a job but are not in paid employment

Question 38

types of unemployment-frictional

Answer 38

many people become unemployed when they move from one job to another

Question 39

types of unemployment-structural

Answer 39

demand for workers with particular skill no longer exist, such that supply of these workers exceeds demand

Question 40

types of unemployment-long term

Answer 40

when a number of people become unemployed for more than a year

Question 41

causes of income inequality and poverty in Australia-luck

Answer 41

Some wealthy households have gained their fortunes through luck that is unrelated to good investment choices, inheritance or any other factors.

For examples, TattsLotto.

Question 42

causes of income inequality and poverty in Australia- inheritance

Answer 42

Most of the wealthiest households in Australia have inherited at least a portion of their wealth.

The inherited wealth can be invested in various assets that are able to generate income.
.

Question 43

causes of income inequality and poverty in Australia-sovereign indebtness

Answer 43

The build of debt incurred by. governments when government spending exceeds government revenue, resulting in a budget deficit that requires borrowing.

It is a problem when the government is unable to make repayments.—> government cut spending relative to the revenue from the taxes.

This slows down the economic activity due to reduction in injections in the economy,

—–>unemployment and increases incidence of poverty as many people are unable to earn enough income to support a basic lifestyle

Question 44

equity in the distribution of income requires

Answer 44

1.Australians have sufficient income to purchase those goods and services that enables them to have a dignified standards of living

2. No persons or household in Australia are experiencing absolute poverty
3. Huge inequalities in incomes are avoided.

Question 45

economic cost of achieving equity

Answer 45

• Equity can result in the quality of the nation’s human capital being lower than would be the case if inequality occurred.
• The Quality of the nation’s capital stock might be lower than would be the case if inequality occurred.
• Equity can result in lower levels of labour and capital productivity.

Question 46

social cost of achieving equity

Answer 46

*There are fewer people motivated to be more creative or entrepreneurial in light of lower levels of inequality.

• Fewer individuals pursuing the goal of greater income and wealth

Question 47

economic cost of inequality

Answer 47

1. Cost to government (or taxpayer) supporting persons who require income support.
2. Short term costs to economic growth = lower income earners spend most / if not all of what they earn- still doesn’t contribute huge amounts to GDP
3. Increased inequality can lead to a decrease in AD- only need one car one house etc. The idea that the middle class drive much of the consumption in AD

Question 48

social cost of inequality

Answer 48

1. Feelings of helplessness and despair
2. Mental health problems
3. An increase in social unrest or anti-social behaviour (such as crime)
4. Development of a ‘class system’ in society - can impair social harmony

Question 49

economic benefits of achieving equity

Answer 49

• Equity can result in the quality of the nation’s human capital being higher than would be the case if inequality occurred.
• The Quality of the nation’s capital stock might be lower than would be the case if inequality occured.
• Equity can result in lower levels of labour and capital productivity.

Question 50

optimal level of inequality

Answer 50

Where, at the margin, the total benefits of inequality just outweigh the total costs.

Any movement away from the optimal level of inequality will result in a deterioration of national living standards.

Question 51

optimum level number

Answer 51

Optimal Level resides between 0.3-0.4 (0.3836) for the Gini Coefficient.

Question 52

productive efficiency

Answer 52

A nations resources are producing the maximum amount possible and productivity levels are at their peak

Question 53

allocative efficiency

Answer 53

Nations resources are allocated and used in a combination that provides the maximum possible benefits for consumer and nation

Question 54

benefits of productive efficiency

Answer 54

1.Improved international competitiveness and a better balance of payments position

2. An increase in aggregate demand and economic growth.
3. Greater employment and lower rates of unemployment.
4. Higher national income levels and the boost to material living standards.
5. Less rapid depletion of natural resources due to increased efficiency and reduced waste in production.

Question 55

benefits of allocative efficiency

Answer 55

1. Allocative Efficiency implied that the ‘right’ goods and services are being produced, consumer and society satistaction is maximised and there is no mis-allocation of resources.
2. Wellbeing of the nation is maximized as the goods and services produced are more valuable and beneficial for the population of the country.

Question 56

vertical equity

Answer 56

redistribution of income using progressive taxes

• High income earners pay more tax
• Low income earners pay less income tax

Question 57

horizontal equity

Answer 57

treating people the same.
Tax should be fair - equal treatment.

People in same income group will pay same
levels of tax.

Question 58

progressive tax

Answer 58

Progressive taxes are those where the marginal rate of tax is higher for upper-income earners than for those on lower incomes (e.g. personal income tax)

Question 59

regressive tax

Answer 59

A regressive tax is a tax applied uniformly, taking a larger percentage of income from low-income earners than from high-income earners (GST, excise taxes)

rate of tax paid doesn’t change as income rises

Question 60

conflicting relo- promoting equity can reduce economic efficiency - government policies

Answer 60

Government policies to redistribute income more evenly generally involve the use of measures such as:

*progressive taxes
* cash welfare benefits
* the provision of free or subsidised government services like health and education
* the setting of a minimum wage in the labour market at a level higher than the market equilibrium.

These measures seek to promote equity rather than efficiency.

Question 61

conflicting relo- promoting equity can reduce economic efficiency - negative impact of government policies

Answer 61

It is claimed that these measures, while improving equity, actually reduce:

• Incentives for individuals to work hard and longer hours.
• Saying that is needed to finance investment and grow productive capacity.
• The motivation to improve skills, training and worker productivity.
• Self-reliance and encourage a welfare dependency that is an economic cost on those who are most productive.

Question 62

conflicting relo- promoting equity can reduce economic efficiency - indirect taxes

Answer 62

Indirect taxes are designed to achieve a more efficient allocation of resources by introducing price signals that ultimately deter the production and consumption of ‘de-merit goods such as alcohol and tobacco.

Question 63

conflicting relo- promoting equity can reduce economic efficiency -Goods and Services Tax

Answer 63

10% tax on most goods and services to largely replaces collection of taxes. By promoting greater certainty and transparency, the GST helped to improve the efficiency of the tax system.

Question 64

a combatible relo- promoting equity can strengthen economic efficiency

Answer 64

Through selected government equity-promoting policies, involving:
*provision of free public education and health
* along with careful welfare measures

Overall the nation’s productivity can be strengthened along with improvements in efficiency

Question 65

conflicting relo- promoting equity can reduce economic efficiency -

1. Government spending on education and training programs

Answer 65

Increased government spending on education + skills training + more effective educational programs,

help to grow employment and income earning opportunities,—-> lower unemployment and —–>less income inequality.

policies also enhance the creativeness, innovativeness and productiveness of our labour force.

Question 65

conflicting relo- promoting equity can reduce economic efficiency -

2.Government spending on health initiatives

Answer 65

Government policy initiatives and spending designed to improve public health and access to medical treatment help improve equity.

Measures like the proper funding of Medicare, for eg , allow even the poor to access quality and affordable physical and mental health care.

—-> better participate in work and be more productive members of the labour force,—> growing the nation’s productive capacity and potential level of income.

Question 66

conflicting relo- promoting equity can reduce economic efficiency -

3. Government measures to improve social inclusiveness-

Answer 66

Government measures to improve social inclusiveness clearly help to improve equity

policies help to grow efficiency by better harnessing and allocating our labour resources, growing the nation’s productive capacity.

Question 67

conflicting relo btwn promoting equity and decreasing efficiency-excise taxes

Answer 67

These taxes are levied on de-merit goods to help re-allocate production of less harmful products.

Question 68

are excise tax and indirect tax progressive or recessive

Answer 68

both taxes are regressive as lower income earners are forces to pay higher proportion of their income in tax when purchasing these goods in comparison to higher earner, hence, it fails to promote equity.

Question 69

is GST regressive or progressive

Answer 69

it is a regressive tax system as it has negative implications for equity in the distribution of income. It does not take into account the income of the consumers.

Question 70

what happens in a market

Answer 70

The market or price system involves interaction between the buyers and sellers for each good or service, to negotiate or determine relative prices.

Question 71

how does market failure occur- weak competition

Answer 71

Markets can sometimes fail when competition between rival firms is weak and there are monopolies and oligopolies that have significant market power to set prices.

This can lead to less innovation, reduced efficiency in the use of resources, and lower production and higher prices, undermining society’s general wellbeing.

Question 72

how does market failure occur- asymmetric information

Answer 72

Markets fail when there is asymmetric information or a lack of adequate knowledge by buyers or sellers.

incomplete information on one side of the market leads to poor decisions, wasted resources and inefficiency, reducing satisfaction and our general wellbeing.

Question 73

how does market failure occur- negative externalities

Answer 73

Markets fail when some of the costs associated with the production or consumption of a particular good are paid by a third party unconnected with the activity.
These costs are called negative externalities.

Ignoring some of the costs means that profitability is inflated and the good is overproduced even though it lowers society’s general wellbeing.

Question 74

how does market failure occur- income inequality

Answer 74

The unregulated operation of markets can cause severe income inequality. This can reduce efficiency and the general wellbeing of society.

Only those with sufficient income can participate in the market and influence the allocation of resources.

Therefore, it is likely that the necessities of life (e.g. housing, education, health) needed by everyone, including the poor, will be underproduced (unless of course these are provided by the government).

Question 75

how does free market cause inequality and inequity

Answer 75

The operation of the market w/o gov intervention causes some ppl to receive high wages for their labour giving them more purchasing power
others receive low wages/ in the absence Of Government welfare; gain no income

While this system may cause resources to be allocated efficiency, it also leads to great wage inequality between different occupations, depriving some people of access to basic goods and services and a reasonable living standard, while others live in affluence.

Question 76

basic economic questions

Answer 76

‘what and how much to produce?’ (deciding the type and quantities of particular goods and services to be produced)

‘how to produce?’ (firms deciding the production methods to be used in making goods and
services)

‘for whom to produce?’ (deciding how the incomes, goods and services should be distributed or shared among members of society).

Question 77

example of asymmetric information

Answer 77

For instance, often sellers know more about the product being sold than buyers. Here, we might think of online purchases or buying a used car.

Question 77

Labour market

Answer 77

Labour market refers to the availability of employment and labour, in terms of supply and demand.

Question 78

example of negative externalities

Answer 78

One example of negative externalities is the high level of CO, emissions by some firms.

Some of these costs - of pollution, climate change, severe weather events, and the destruction of life and business that reduce our wellbeing now and into the future - are paid by others.

Question 78

conflicting relo- promoting equity can reduce economic efficiency -

3. Government measures to improve social inclusiveness- example

Answer 78

eg.) anti-discrimination laws +measures to improve gender equity in the workplace that —> enhance equity, improve the quality of daily life, and grow employment opportunities and the wellbeing of those who commonly face poverty.

Question 79

proportional taxes (company tax)

Answer 79

The rate stays the same regardless of how much income is earned

this type of tax us purely for raising revenue, rather than re-distribution

Question 80

government approach’s to manage equity

Answer 80

*Progressive Taxes
* Welfare payments
* Free/subsidised goods/services
* Superannuation contributions
* Targeting Unemployment
* Exemption from Taxes

Question 81

government approach’s to manage equity-Using the budget to help reduce inflation and unemployment, to help promote equity

Answer 81

To help avoid inflationary booms or recessions where there is high unemployment, the Australian government uses the budget as a stabiliser of spending or AD by adopting either a contractionary or expansionary approach.

For this to happen, the budget must be applied in a countercyclical way.

Question 82

government approach’s to manage equity-Encouraging superannuation contributions to promote equity

Answer 82

Australia =ageing pop which is living longer, yet there is a declining proportion of the population who are of working age and paying taxes to support these older people.

When people no longer work, they usually have lower incomes or none at all. –> pressure on our welfare system.

helping workers to retire with more adequate superannuation, the burden on the nation’s finances is eased + retirees should be able to enjoy better living standards and live above the poverty line.

Question 83

government approach’s to manage equity-Providing free or subsidised government services or merit goods to promote equity

Answer 83

Federal and state governments use their budgets to provide a range of community services (e.g. public education, health, some prescription drugs and housing)

free of direct charge or at a relatively low, subsidised price.

Question 84

government approach’s to manage equity- Using cash welfare payments to promote equity

Answer 84

Welfare benefits account for around 35 per cent of all expenses.

they are mostly adjusted upwards or indexed as consumer prices and the cost of living go up. This is designed to help protect their purchasing power.

Welfare works to promote equity by lifting the incomes of the poor so they can better purchase basic goods and services and enjoy reasonable living standards.

Question 85

government approach’s to manage equity-Regressive Tax

Answer 85

Regressive indirect taxes increase inequality and reduce equity.

Some of Australia’s taxes are regressive: where the rate of tax paid as a proportion of income decreases as income rises.

Question 86

government approach’s to manage equity- Progressive Tax System

Answer 86

Progressive income tax can help reduce inequality and ultimately promote equity.

PIX helps to alleviate poverty by taking a larger proportion of income from the rich than from those on low incomes.

The money raised in this way potentially becomes available to pay for welfare benefits and the provision of essential services (e.g. public health and education) .

Question 87

budget for countercyclical way

Answer 87

In an inflationary boom, the budget typically becomes contractionary involving rises in receipts and reductions in some outlays that slow AD.

In a recession, the budget typically becomes expansionary through lower tax receipts and higher budget outlays that boost AD.

Question 88

merit goods

Answer 88

if not paid for by the government, they would be underproduced and too expensive for ordinary families. Providing these makes such services more affordable for the poor than would otherwise be the case.

Examples include transport, education and health

Question 88

Examples of indirect regressive taxes

Answer 88

GST that is levied at the general rate of 10 per cent on most,

the former carbon tax (2012-14), and the excise taxes on petrol, tobacco and alcohol that are as high as 40 per cent. They are added onto the price of goods and services at the point of sale, making items dearer for buyers.

Question 89

Direct progressive income taxes example

Answer 89

PAY or ‘pay as you go’ personal income tax, capital gains tax are those where the marginal tax rate rises as income increases.

Question 90

superannuation

Answer 90

superannuation is a levy which requires employers to make retirement contributions on behalf of their workers.

Question 91

government approach’s to manage efficiency - Using lower tax rates to increase efficiency

Answer 91

• This encourages participation, lowers cost of production and as a result increases AS
• the top marginal rate of personal income tax in Australia has gradually been reduced to an expected 45 per cent from July 2016.
• the top rate of company tax now is 30 per cent for large firms and, if implemented, 27.5 per cent for small to medium-sized businesses from July 2016, and 25 per cent has been proposed for all businesses from 2026-27.

Question 92

government approach’s to manage efficiency - Using budget outlays to increase efficiency

Answer 92

• Budget spending on national infrastructur
• This increases productivity and availability/accessibility of resources

Question 93

government approach’s to manage efficiency - Using outlays on education training and skills

Answer 93

• This increases productivity by increasing the skill level of our work force.
• People are more trained and upskilled to do the jobs, therefore unemployment decreases.
  —> the nation’s productive capacity also increases with the availability of more production resources such as labour.
• Governments does this by providing free education in public school, subsidized cheaper courses at university level and free short tafe courses.

Question 94

government approach’s to manage efficiency -Taxes on De-Merit Goods

Answer 94

*De-Merit gods are considered to be undesirable from society’s point of view and are typically overproduced and consumed in in an unregulated market.

• To correct this market failure, government either prohibits the production or consumption of these goods or implement Indirect Taxes.
• Indirect Taxes are applied on the production of the goods, hence rising, the final price for the consumers. This discourages the consumption of de-merit goods via the effect on prices. As the price increases relatively to other substitutes, it causes consumers to reduce their demand and instead increase the demand for other products.

Question 95

government approach’s to manage efficiency - Subsidisation of merit goods

Answer 95

Government subsidies refer to benefits provided to individuals or groups in order to support activity that is considered to be beneficial for the society.
They are usually in form of cash payment or tax concession.

These are often underproduced as they are not profitable.

However, if the government believes the private sector should be providing the g/s with some gov support, then it can choose to subsidise the producer or consumer of the merit good. This addresses the market failure of under allocation of resources.

Question 96

example of demerit goods

Answer 96

For example, without government intervention, there would be overallocation of resources to the production of cigarettes, alcohol and recreational drugs which means that would lead to inefficient allocation of resources.

Question 97

example of merit goods

Answer 97

Merit goods are provided by the government generally free of charge like parks, government schools and public hospitals.