Chapter 7

Question 1

Income

Answer 1

A flow of money to a factor of production usually labour

Question 2

Wealth

Answer 2

A stock of valuable assets such as property or shares

Question 3

Factors leading to unequal distribution of income

Answer 3

Differences in skills, qualifications and work experience

Differences in wealth

Impact of the state (free market would provide fewer welfare benefits than a command economic system)

Question 4

Factors leading to unequal distribution of wealth

Answer 4

Differences in income

Inheritance

Marriage (wealthy married wealthy)

Property

Question 5

Equality

Answer 5

Wealth and income are shared out the same between all members of society

Question 6

Equity

Answer 6

Fairness
(Justified if some work longer or harder than others)

Question 7

Lorenz curve

Answer 7

Measuring and illustrating the extent of income and wealth inequality

Question 8

Gini coefficient

Answer 8

Statistical measure of the degree of inequality

Question 9

Possible costs of income and wealth inequality

Answer 9

Social tensions (may lead to friction, crime and rioting)

The creation of an ‘underclass’ (society may become reliant on welfare benefits)

Question 10

Possible benefits of income and wealth inequality

Answer 10

Incentive effects (increase economic activity to be competitive)

Trickle down

Question 11

Trickle down

Answer 11

Free market view that poorer members of society will benefit from high earners and the relatively wealthy (through job opportunities and helping to fund merit goods)

Question 12

Relative poverty

Answer 12

When some people in society are worse off than others (earning less than 60% of a country’s median income)

Question 13

Absolute poverty

Answer 13

When some people can’t afford the basic necessities to sustain life (food, shelter and warmth)

Question 14

Cause of poverty

Answer 14

Relatively low wages

Unemployment

Regressive tax

Old age

Imperfect information (people are unaware of their eligibility to claim welfare benefits)

Question 15

Effects of poverty

Answer 15

Greater demands on the welfare system

Poor educational attainment

Poor health

Question 16

Policies to influence distribution of income and wealth to alleviate poverty

Answer 16

Progressive tax

National minimum wage

Welfare benefits

Education and training

Reducing unemployment

Promoting trickle down

Question 17

Economic consequences of policies to alleviate poverty

Answer 17

Progressive tax (can create disincentive to work, lead to slower economic growth and reduce income tax revenue)

National minimum wage (may increase unemployment)

Welfare benefits (may reduce incentive to work)

Education and training (many courses are expensive)

Reducing unemployment (expansionary fiscal and monetary policies have time lag before their full effects are felt, may cause demand pull inflation)

Promoting trickle down (may not work in reality)