Ch 12: Income Distribution

Question 1

What are the key elements of income?

Answer 1

• private income - wages and salaries, income from investment, income from superannuation funds
• gross income - adding any transfer payments a household receives from the govt i.e. pension
• disposable income - direct and indirect taxes are deducted
• final income - indirect benefits added i.e. school fees assistance

Question 2

What is wealth?

Answer 2

• the difference between a household’s assets (property, shares, savings, superannuation) and its liabilities (mortgages, personal loans, credit card debit)
• cirrent balue of assets a houshold has accumalated over time through savings, financial investments, business profits

Question 3

How is the distribution of income measured?

Answer 3

Gini co-efficient:

• measure that indicates the degree of curvature or concavity of the line - the degree of income inequality in a country
• Gini co-efficient = region A / (region A + B)
• when 0 = perfectly equal, 1 = absolute inequality
• Australia 0.32 - 2011-12

The Lorenz Curve:

• shows the % of income received by different sections of the population (who are ranked accoding to their income)

Question 4

What are some reasons for the inequality in income and wealth in Aus?

Answer 4

• education, training and experience
• occupational conditinos (hours worked, geographical location, degree of danger)
• personal aptitude (innate talens, developed skills)
• opportunity (family background, decisions over the course of a working life)
• involuntary factors (sickness or disability, age, involuntary unemployment)

Question 5

How is income redistributed in Australia?

Answer 5

• direct taxation - personal income tax is progressive, so high income erarners pay a greater proportion of their income in tax
• transfer payments - direct transfer provide direct income support for a number of groups i.e. pensions, welfare benefits (42% of govt. spending)
• indirect govt payments - services subsidised by the govt. These help to resdistribute income and make those servie more affordable i.e. merit goods/social wage - roads, eductaion, housing, health

Question 6

Why is the redistribution of income important?

Answer 6

Because the level of a household’s income:

• provides the rewards and incentives that drive market economies
• affect the material standard of living of the people in the household (affects people’s ability to satisfy physiological needs and wants which in turn influence the pattern of output through their spending)

About 2/3 of the Commonwealth Govt. spending is directly and indirectly linked to their redistributive role

Question 7

What does the government aim to balance?

Answer 7

economic growth (efficiency) with distributive justice (equity)