5.1 The distribution of income and wealth Flashcards
What is the difference between income and wealth?
Income: personal or household income is the flow of money a person or household receives in a given period of time
Wealth: personal wealth is the stock of everything which has value that a person or household owns at a particular point in time
Is there a correlation between income and wealth?
Wealth is a stock concept - measured at a given point in time
Income is a flow concept - measured over a period of time
Income is money generated from wealth therefore there is a correlation
What is the difference between equity and equality?
Equality means everyone is treated the same exact way, regardless of need or any other individual difference. Equity, means everyone is provided with what they need to succeed.
What do free market capitalists argue about inequality?
Free market capitalists argue that it creates incentives among economic agents that has a positive impact on national income and can ‘trickle down’ to poorer members of society - raising overall living standards.
What is human capital?
The skills, qualifications and experience of a worker based on their value to a firm
Skilled workers tend to be more wage inelastic and can bid up their wage price
How can workers increase their human capital?
Workers might increase their human capital by:
- Attaining higher educational qualifications e.g. degree level or beyond
- Training
- Gaining experience in the workplace
- Human capital leads to wage differentials between workers
What factors influence the distribution of income?
- FoP
- Earned/unearned income (salaries/investments)
- Wage and salary differentials
- Globalisation and international migration of workers
What is horizontal equity?
Households with the same income and personal circumstances (i.e number of children) pay the same income tax and are eligible for the same welfare benefits.
What is vertical equity?
Much more controversial. Justifies taking income from the rich and redistributing it to the poor (on the grounds that the rich do not need it)
What is the lorenz curve?
- Measures the extent to which the distribution of income (or wealth) is equal or unequal
- The Lorenz curve shows the % of the population on the x axis and the % of income received is on the y axis
- A completely equal distribution of income would look like line A
- The closer the curve is to diagonal, the more equal the income distribution is
- The further the curve dips below a straight diagonal line indicates more inequality
What is the gini coefficient?
Measures the area between the Lorenz curve and the diagonal as a ratio of the total area under the diagonal
0 would mean all income is equal
1 would mean one person has all the income
What is the equation for the gini coefficient?
FORMULA: Area A / Area A + Area B
What are the benefits of a more equitable distribution of income and wealth?
- Faster economic growth - people have more money to spend
- Raising living standards - less crime, safer for all, increased happiness
- Less wasted talent - lower income children
What are the drawbacks of a more equitable distribution of income and wealth?
- Lack of incentives - progressive taxes
- This then has an impact on economic growth
- Extreme pro-free-market view: increase inequality, make those who work hard, work harder, and the unwaged people to search for jobs
