Unit 4: Inequality Flashcards
What is Income, and what is Wealth?
Income: The amount of money received over a set period of time. (what you receive)
Wealth: The value in money of assets held. (what you own)
Why do people receive Different Incomes?
Some skills are more Highly Demanded than others, so they receive higher wages
Workers in the Public Sector earn more per week than those in the private sector
Average full time earnings also differ considerable between Different Regions (e.g. London vs the North)
Why is Wealth more Unevenly Distributed than Income?
- Wealth often Earns Income
(e. g. shares may increase in value, generating more income)
- Reinvestment - Those earning income from their wealth can invest that income again (e.g. buy more shares), generating even more income
- This makes the wealthy even wealthier; and those with low wealth can’t invest as much - Assets tend to increase in value Quicker than income rising
- Income is taxed, but wealth isn’t
What is the Lorenz Curve?
The Lorenz Curve shows income inequality
x axis - Cumulative % of the population
y axis - Cumulative % of income
A straight upwards line shows perfect equality, and the greater the gap between the Lorenz curve and the perfect equality line, the greater the inequality.
What are the Positives of Inequality?
- Incentive for people to Work Harder + Earn More
This increases productivity, and reduces benefits - Trickle Down Effect
The rich become richer, they spend more on goods & services which provide more income for the poor - Encourages Enterprise
What are the Negatives of Inequality?
- Absolute + Relative Poverty stays high
- The poorest won’t be able to fund businesses- restricts economic growth
- Rising incomes - high spending on imports - more withdrawals
- Crime is likely to increase (e.g. theft)
What is Equality, and what is Equity?
Equality means that everyone is treated completely equally; they all get exactly the same things
Equity is more about fairness - people have different circumstances, so it’s more about people getting what they need
What are the 2 Types of Equity?
Horizontal Equity- people with the same same circumstances are treated fairly (i.e. they’re treated the same)
Vertical Equity - people with different circumstances are treated fairly, but differently
What are some UK Inequality facts?
The ONS reported that in the 2015-16 tax year inequality in Britain (measured by the Gini Coefficient) fell to its lowest since 1986
What is the Impact of economic change and development on
inequality?
Kuznets hypothesis states that as society moves from agriculture to industry, so it develops, inequality within society increases, since the wages of industrial workers rises faster than farmers.
Then, wealth is redistributed through government transfers and education. He essentially argued that inequality in poor countries is just a transitional phase, and once nations become economically developed, inequality reduces.
Thomas Piketty famously discredited this theory in 2014 by arguing that the capitalist free market system inevitably leads to continued inequality. The rate of return on capital increases, so as the rich get richer with higher returns on their investments, inequality increases.
What is Capitalism?
Capitalism is a society where capital is privately owned and workers are paid wages by private firms.
There is minimal government intervention and resources are distributed according to the market.
What is the Significance of capitalism for inequality?
In a capitalist society, entrepreneurs take risks and are driven by the profit motive. Profits are a reward to take risks. Therefore, inequality is essential to encourage entrepreneurs to take risks.
Inequality motivates workers, which encourages them to learn new skills and work hard. A higher wage reflects higher productivity in a capitalist society, which results in wage inequality.
Capitalism leads to monopoly power. Monopolies can exploit consumers with higher prices, and exploit their consumers with lower wages. This allows them to earn even higher profits.
Inheritance is passed down generations, which means wealth is often concentrated in the hands of a few families. Those who inherit lots have more wealth. They can also access the best education and therefore the best jobs, which is not accessible by those with less wealth. It results in an inequality of opportunity and income. Wealth can generate more income for the rich, which widens inequality.
There can be income redistribution and wage equality through government intervention. For example, inheritance tax means rich families cannot keep their entire wealth. Moreover, state education means everyone can access education, and there is regulation for firms with monopoly power. It can be argued that this stops the economic system from being capitalist.
Essentially, the price mechanism and the free market ignore equality. To evaluate, it can be argued that inequality exists, but the degree of inequality may vary between capitalist societies.
What is the Kunetz Curve?
Y axis: Rising Inequality (going upwards)
X axis: Rising incomes
The graph shows an upside down parabola; suggesting inequality initially rises but then goes back down
