Unit 5

Question 1

What’s the difference between income and wealth?

Answer 1

Income is a flow of money whereas wealth is a stock concept from assets owned.

Question 2

What is the distribution of income and wealth?

Answer 2

How income and wealth is divided between rich and poor or different groups in society.

Question 3

What factors influence the distribution of income?

Answer 3

The Government
- Policies (progressive tax)
Wealth
Human Capital
- Skills and experience of work
- Human capital leads to different wage pays

Question 4

What factors influence wealth?

Answer 4

Inheritance
Marriage
Income

Question 5

What is equity?

Answer 5

The fair distribution of resources in society

Question 6

What is equality?

Answer 6

The equal distribution of resources in society

Question 7

What are policy prescriptions?

Answer 7

The plans set out by economic agents in order to meet their objectives

Question 8

What are the costs of inequality?

Answer 8

Social Tensions

Creation of ‘underclass’

Question 9

What are the benefits of inequality?

Answer 9

Incentives

Trickle down

Question 10

What is the Gini Coefficient?

Answer 10

The measurement of the level of income or wealth inequality in an economy

Question 11

How do you work out the Gini Coefficient?

Answer 11

A/A+B, the closer to 0 means a more equal society

Question 12

What curve measures inequality?

Answer 12

Lorenz Curve

Question 13

What is relative and absolute poverty?

Answer 13

Relative: When some people in society are worse off than others
Absolute: when people can not afford basic necessities in life

Question 14

Causes of poverty?

Answer 14

Age
- Each generation is richer than the last
- Relying on state pensions
Low Wages
- Supply of labour is elastic, meaning low wages which makes it harder for people to make a good income
Imperfect Information
- not knowing they can claim welfare benefits
Unemployment
Regressive Tax

Question 15

Consequences of poverty?

Answer 15

• Social Tension
• Increased crime
• Reduced happiness
• Unsafe environment for all
• Poor health
• Poor education

Question 16

What do governments do to alleviate poverty?

Answer 16

• Progressive income tax
• Welfare benefits
• National Minimum Wage
• Merit Goods (education/healthcare)

Question 17

What are the consequences of the government policies used to alleviate poverty?

Answer 17

• Disincentives to work (progressive tax/welfare benefits)
• Minimum Wage increases unemployment (increased costs for businesses)
• Education takes time and is costly

Question 18

What is the earning trap?

Answer 18

Affects people with low incomes in poverty rather than unemployment