unit 2 area of study 2

Question 1

Equivalised Income

Answer 1

Disposable income adjusted to take in the size and composition of households. Takes into account the number of people relying on the income thus providing a more effective comparison between income and living standard.

Question 2

Dividends

Answer 2

The payment of profit to shareholders. The return for providing capital (or equity) to a company.

Question 3

Gross Income

Answer 3

All private or market income plus direct cash benefits received from governments such as pensions, family tax benefits and unemployment benefits.

Question 4

Unearned Income

Answer 4

Income that represents a reward for providing resources other than labour. For example dividends, are the return for providing capital, rent is the return for providing land or property and interest is the return for providing a loan.

Question 5

Household Income

Answer 5

Consists of all receipts, whether monetary or in kind, that are received by the household or by the individual members of the household and which are available for, or intended to support current consumption.

Question 6

Rent

Answer 6

The income return for providing land or property.

Question 7

Social Wage Income

Answer 7

Disposable income plus indirect government benefits provided in the form of goods and services such as housing, health care and education. Also referred to as disposable income plus social transfers in kind.

Question 8

Wealth

Answer 8

The total monetary value of assets (such as property and cash) which can be used to buy goods and services in the future.

Question 9

Transfer Income

Answer 9

Any income that has been transferred from one group to another usually via the government such as pensions, unemployment benefits and family tax benefits. Can also include non-government payments
such as child support payments.

Question 10

Disposable Income

Answer 10

Gross income (Private income plus government transfer payments) less direct taxes (such as income tax)

Question 11

Indirect Tax

Answer 11

A tax paid by economic agents via their purchases of goods and services for example; the Goods and Services Tax (GST) and excise taxes on fuel, alcohol and tobacco.

Question 12

Factor Income

Answer 12

The total return on the factors of production for the contribution to the production process. Includes both earned and unearned income. Includes all salary and wages, interest, dividends, royalties and rental income.

Question 13

Final Income

Answer 13

Social wage income less production (or indirect) taxes.

Question 14

Income in kind/ Fringe benefits

Answer 14

Receipts received from employers of a non-cash basis such as the use of a company car or the payment of other expenses such as housing or
parking.

Question 15

Discretionary Income

Answer 15

The income available for consumption on goods and services following the payment of unavoidable expenses, such as mortgage repayments, rent and utilities.

Question 16

Direct Tax

Answer 16

A tax paid directly on economic agents, normally based on the income they earn, such as income and company taxes.

Question 17

Earned Income

Answer 17

Represents income received for a reward for an individual for their direct or physical contribution (labour) to the production process. For example salary or wages.

Question 18

Private or Market Income

Answer 18

Income received in the market place. Includes factor income but also includes private transfers such as child support payments and scholarship income.

Question 19

Nominal Income

Answer 19

The value of income that is received by an entity in actual dollar terms.

Question 20

Real income

Answer 20

The value of income received after taking into account the effects of inflation (a general increase in the level of process). Inflation can reduce the purchasing power of a person’s income.

Question 21

equality

Answer 21

is related to evenness- where each receives the same. while this may achieve equality, it may not necessarily achieve equity.

Question 22

equity

Answer 22

is related to fairness. In most advanced economies, including Australia, governments seek to achieve ‘equity’ in the distribution of income, but not ‘equality’ in income distribution.

Question 23

Absolute Poverty

Answer 23

when people live in a situation where they have insufficient income to purchase the basic G+S they need such as food, shelter and clothing.

Question 24

Relative Poverty

Answer 24

Where households have a low level of income as compared to a generally agreed standard. peoples living standards are low relative to or compared with some changing level deemed acceptable to the community. in Australia this standard is the Henderson Poverty Line.

Question 25

Henderson Poverty Line

Answer 25

is a fixed proportion of the average household income and will rise over time as the nations income and wealth rises. This line is usually set at 50% of average Australian incomes.

Question 26

Effect of Poverty on material living standards

Answer 26

. low level of financial means will mean reduced access to G+S
. reduce a persons ability to pay for health care, education, healthy food and safe clean accommodation.

Question 27

Effect of poverty on non-material living standards

Answer 27

. Increased mental illness (depression, anxiety)
.Increased social unrest and anti-social behaviour
. Development of a class system between the ‘haves’ and the ‘have nots’

Question 28

Lorenz curve

Answer 28

plots the % share of total income earned on the vertical axis against each quintile on the horizontal axis. It highlights the share of total income earned by each 20% of the household population.

Question 29

gini coefficient

Answer 29

is a number between 0-1, in 2015-16 it was 0.323. It provides an indicator of the degree of inequality in the distribution of income. It can be calculated by referring to the Lorenz and dividing the area between the curve and line of totally inequality by the total area under line of absolute equality.

Question 30

difference between nominal and real income

Answer 30

whether inflation is considered or not

Question 31

causes of income inequality

Answer 31

. factors relating to the labour market
. skill (education + training)
.Talent e.g. sporting and acting
. Unemployment
. Luck e.g. tattslotto
. inheritance -debate into inheritance tax
. sovereign indebtness (when developing countries struggle to repay debts to other countries)

Question 32

Cyclical unemployment

Answer 32

caused by weak aggregate demand, slow economic growth, a down turn in the economy or a recession.

Question 33

structural factors of unemployment

Answer 33

new technologies making some jobs obsolete; the mismatch of skills held by the unemployed to the jobs available; business relocation or closures; rationalisation by firms such as the introduction of cost-cutting measures; some government microeconomic policies.

Question 34

frictional factors of unemployment

Answer 34

people unemployed during their job search between one job and the next

Question 35

seasonal factors of unemployment

Answer 35

unemployment that occurs at the same time each year e.g. shearing sheep and fruit picking are seasonal

Question 36

Hard-Core factors affecting unemployment

Answer 36

personal characteristics that make holding down a job difficult e.g. person with a disability or perhaps those with a criminal record may find obtaining employment difficult.

Question 37

Hidden employment

Answer 37

involves people who would like work but who are discouraged from seeking jobs for various reasons, such as repeated failure to find work and who have left the labour force and therefore are no longer “actively looking for work”

Question 38

disguised unemployment

Answer 38

is where individuals have jobs but are underemployed and not working to capacity, such as in part-time jobs with limited hours.

Question 39

allocative efficiency

Answer 39

nations resources are allocated in a way that optimises the satisfaction and living standards of society. The best possible combination of G+S to maximise the nations living standards,

Question 40

technical efficiency

Answer 40

producing the maximum output possible at the lowest possible cost. Productivity (the ratio of output to total inputs used in production) levels are at their peak.

Question 41

role of markets in achieving efficiency

Answer 41

market is an effective way to allocate resources to their best use for society (allocative efficiency). market will normally distribute highest incomes to most productive + efficient members of labour force, indicating to owners of resources to help use talents in occupations that are financially rewarding. However, sometimes market fails to make good decisions that maximise both efficiency and equity, known as market failure. As a result societies general wellbeing is reduced. In some instances governments are forced to intervene.

Question 42

role of markets in achieving equity

Answer 42

it provides fairness so everyone has equal opportunities. Everyone is able to access basic G+S; dignified standard of living. There are no inequalities in income, nor is anyone living in absolute poverty.

Question 43

benefits of achieving equity in income distribution

Answer 43

. No-one living in absolute poverty 
. high standard of living
. sufficient income to purchase G+S
. No huge inequalities in income > opportunities
. People are employed therefore less payments/income support
.decrease crime
.improve mental health
.improved quality of life

Question 44

costs of achieving equity

Answer 44

. unfair everyone to earn same income, therefore less incentive to work hard e.g. surgeon and janitor
.loss of entrepreneurial activity as people are less likely to take risks for small reward
. decreased productivity

Question 45

optimal level of inequality

Answer 45

a point where the total social and economic benefits of inequality just outweigh the costs. Any movement away from this optimal level of inequality will result in the deteiatoin of living standards. level usually resides between 0.3-0.4 for gini coefficient.