Income, Equity and Disparity

Question 1

Macro Goal

Answer 1

• Establish equity in the distribution of income in a country
• Disitinguish between equity and equality
• Distinguish between absolute/extreme poverty and relatively poverty

Question 2

Causes of Poverty (6)

Answer 2

• Inequality of oppourtunity
• Different levels of resource ownership and human capital
• Discrimination (gender, race, others)
• Globalization
• Technological change
• Unequal status

Question 3

Measuring Poverty

Answer 3

Single indicators:

• International poverty lines
• Minimum income standards

Composite indicators:

• E.g. Multidimensional poverty index (MPI)

Question 4

Consequences of Poverty

Answer 4

• Low living standards
• Lack of access to sufficient health care
• Low levels of education

Question 5

Lorenz Curve

Answer 5

Shows the income distrubution of the economy

• 45º line shows perfect income distribution

The further away from the curve, the unequal the country is

Question 6

Gini Coefficient

Answer 6

A measure of the degree of income inequality of a country that ranges from 0-1

• 0 = perfect income equality
• 1 = perfect inequality

Question 7

Income

Answer 7

Economics payment (rent ,wages, interest, profit) paid over a period of time. These can be earned or unearned.

Unearned - interest payments, inheritence, rent earned from real estate

Earned - salary

Question 8

Wealth

Answer 8

Stock of economic goods and services owned and measured at a particular time

Question 9

Direct taxes

Answer 9

Taxes on income:

• Income tax - tax on personal income
• Coporate tax - tax on profit
• Inheritance tax - tax on the transfer of income and wealth

Question 10

Indirect tax

Answer 10

Taxes on goods and servives (including tariff)

Question 11

Tax Systems

Answer 11

Progressive tax system - the rate of tax paid increase as income increases

Proportional taxes - The rate of tax paid remains the same regardless of income

Regressive taxes - The rate of tax paid decreases as income increases

Question 12

Evaluation comments for Transfer payments

Answer 12

• Not included in GDP as they aren’t payments for goods or services.
• Government provision of merit goods helps distribute income

Question 13

How governments use income tax

Answer 13

transfer payments - any payment that the government makes to a particular group of society.

• Use to redistribute income from wealthier taxpayers to poor to improve living standards.

Question 14

Ways to make income distribution more equitable

Answer 14

• Taxation
• Transfer payments: subsidies, unemployment benefits and disability benefits
• Improve access to education and healthcare to create jobs and lower corruption

Question 15

Further policies to reduce poverty, income and wealth inequalities

Answer 15

• Policies to reduce inequalities of opportunities/investment in human capital
• Transfer payments
• Targeting spending on goods and services
• Universal basic income
• Policies to reduce discrimination
• Minimum wage

Question 16

Universal Basic Income (UBI)

Answer 16

• A government-guaranteed minimum income for every individual
• Very expensive - only an option for rich country
• Can only work if the people are responsive to the UBI

Question 17

Pros of UBI

Answer 17

• Help people make ends meet during tough times
• Safety net for those in unstable jobs
• Allows some planning for the future
• Changes people’s attitude to work
• Relatively easy for government to administer
• Durring recessions, it would help cushion fall in AD
• Could help to break poverty traps

Question 18

Cons of UBI

Answer 18

• Very expensive for government
• Discourages working & individuals from taking up full-time jobs
• Renders taxes for low income brackets less useful
• Not helpful for tax payer
• Economy would see a significant rise in AD (inflation)

Question 19

Minimum wage

Answer 19

The minimum wage employers must pay for work, not negotiable

Question 20

Pros of raising minimum wage (similar to Business)

Answer 20

• Work done by minimum wage workers cannot be done by machines
• Motivate people to work
• Higher productivity
• Encourage to stay in their jobs longer
• Reduce costs in hiring and training new workers

Question 21

Cons of raising minimum wage

Answer 21

• Higher costs of production = higher prices to consumers
• Price of labor increase = machines replace workers
• Business that cannot afford to pay higher wages → bankrupt → unemployment
• Higher min. wage → less demand for workers → unemployment for unskilled workers working at min. wage

Question 22

Average tax rate

Answer 22

• % of tax paid by an individual of their whole income
• total tax paid/income x 100

Question 23

Marginal tax rate

Answer 23

• change in % of tax paid compared to change in income
• change in total tax paid/change in income x 100