Week 18 & 19 Flashcards
income definition
represents the flow of money that an individual or household receives within a given period
3 examples of income (a flow of money)
- salary
- welfare benefits
- company dividends
wealth definition
the stock value of all the assets that an individual or household owns at a point of time
3 examples of wealth (stock of value)
- property
- shares and bonds
- pension
explain how income and wealth are like recurring circle
as income grows, individuals are in a better position to purchase assets
then some assets can provide individuals with a top up of their income
equality of outcomes definition
how evenly distributed the income and wealth of a country is across society
equity of outcomes definition
how fairly distributed the income and wealth of a country is across society
what is a difference between equality and equity of outcomes
equality of outcomes has a clear objective view and can be shown statistically
whiles equity of outcomes is a subjective view which is dependent on the person forming the viewpoint
what are 4 factors that influence the distribution of income in the uk
- ownership of factors of production (e.g land)
- Pay differentials in labour markets (e.g wage difference between a manager and a cleaner)
- international factors - globalisation
- difference in income sources (earned vs unearned income)
how does globalisation influence the distribution of income in the uk
- job outsourcing (jobs moving to cheaper regions in the world
- international migration (excess supply of labour causing cheaper wages)
what are 4 factors that influence the distribution of wealth in the uk
- asset prices increase
- inheritance
- private pension pots
- tax loopholes
what are the 2 ways of measuring inequality in an economic system
- lorenz curve (graphical representation of inequality
- Gini coefficient (statistical representation of inequality)
how does the lorenz curve represent inequality
helps visualise the state of inequality in an economic system relative to a system of complete equality
how does the Gini coefficient represent inequality
provides a simple index figure that can be compared across time and countries
lorenz curve definition
A graph which indicates income inequality by plotting the cumulative % of total national income against the cumulative % of the corresponding population
How do you plot a lorenz curve to measure inequality
need cumulative % of population - split the population into 10 even segments (10 percentiles)
need cumulative % total of income - 100% would be the total cumulative income then work backwards from there
line of equality definition
line of equality represents the lorenz curve when all population segments earn the same share of income
is the line of equality a realistic situation for an economic system
no because
- wage differentials
- ownership of assets
- impact of migration
- impact of globalisation
How do we interpret the lorenz curve
the focus is on the gap between the line of equality and the curve
- the greater the gap the greater the inequality
is there a way of measuring how evenly distributed a country’s income is precisely
Yes
Gini Coefficient
Gini Coefficient definition
a statistical measure of the level of income inequality in an economy calculated by analysing the size of any inflexion in the lorenz curve
How do you calculate the Gini Coefficient
name the area between the lorenz curve and line of equality > A
name the complete area under the line of equality > B
calculation: Area A / Area B = Gini coefficient
How is total equality shown by the Gini coefficient
when total equality = 0
Area A = 0
how is total inequality shown by the Gini coefficient
total inequality = -1
Area A = Area B
what are the 2 approaches to tackling ineqaulity
- interventionist approach
- free market approach
interventionist approach to tackling inequality
inequality is a barrier to growth
Policies directly aimed at redistributing income away from the rich and to the poor
free market approach to tackling income inequality
inequality is a by-product of growth
Policies which may increase inequality in the short-run to create opportunity to reduce inequality in the long-run
how does interventionist approach redistribute income
> high taxes for high earners provides the government with more tax rev
–> this can then be re-distributed to the poor to increase purchasing power
—–> this generates higher levels of growth and increases welfare for all
because low income earners are the driving force behind consumption growth
what do supporters of free market believe about the interventionist approach
that it is not sustainable
as free market believe in redistributing income in the long run and in a sustainable way
how does the interventionist approach disincentivise work and cause potential unemployment
high income earners - taxed more so incentive to work harder is put off by higher taxes > reduces entrepreneurial activity
low income earners - the incentive to become employed is put off by more generous welfare payments > reduces size of workforce
what does the free market approach to income distribution specifically tell us
the tax and benefits system should be structured to increase people incentives to get back into work
what is a negative of the free market approach to income distribution
due to aiming for long-run solutions and sustainability
it may mean in the short-run inequality has to get worse before it gets better
