Income & Wealth Distribution

Question 1

what is the definition of income ?

Answer 1

the flow of money received from the factors of production
(Rent, wages, interest and profit)

Question 2

what is the definition of wealth ?

Answer 2

the stock of assets that households own
(Property, shares, art, pension schemes)

Question 3

how is income inequality caused ?

Answer 3

the unequal flow (distribution) of income to households

Question 4

how is wealth inequality caused ?

Answer 4

differences in the number of assets households own

Question 5

what are the causes of wealth and income inequality ?

Answer 5

. human capital (poor education system will see greater inequality, higher skills means higher incomes)

. inequality & opportunity (poor education and healthcare systems, means job opportunities are less)

. Ownership of assets (generate income)

. discrimination, leading to wage differentials (gender, race etc.)

Question 6

what is equality ?

Answer 6

Equal distribution of income

Question 7

what is equity ?

Answer 7

Fair distribution of income

Question 8

what are the 3 main measure of inequality ?

Answer 8

Lorenz Curve (visual indicator)

Gini Coefficient (mathematical calculation)

HDI (Human Development Index)

Question 9

what is the Lorenz Curve ?

Answer 9

a visual representation of income inequality that exists between households in an economy

Question 10

how is the data often presented in a Lorenz Curve ?

Answer 10

quantiles (population is divided into 5 groups)

&
deciles (population is divided into 10 groups)

Question 11

what does perfect equality look like on a Lorenz Curve ?

Answer 11

directly proportional straight diagonal line

Question 12

how do you work out the Gini Coefficient ?

Answer 12

(Area A) / (Area A + Area B)

Question 13

if the value you get from the Gini coefficient is 0 what does that tell us ?

Answer 13

perfect equality

Question 14

if the value you get from the Gini coefficient is 1 what does that tell us ?

Answer 14

perfect inequality

Question 15

what are 2 ways the government can shift the Gini Coefficient closer to 0 (perfect equality) ?

Answer 15

progressive taxation

welfare payments

Question 16

what is Capitalism ?

Answer 16

an economic system based on private ownership of the means for production & profit.

Question 17

why does capitalism inevitably lead to inequality ?

Answer 17

those with higher skills receive higher incomes

those with little to no skills receive little to no income

Question 18

why is capitalism to a certain extent essential ?

Answer 18

gives us the incentive to acquire a higher income, productivity, and output

Question 19

what are the costs of inequality ?

Answer 19

• disincentives (inequality can act as a disincentive to work as society is unfair)
• living standards (rich get richer, poor get poorer)
• social instability (higher levels of crime, instability, and social unrest)

Question 20

what is absolutely poverty ?

Answer 20

where individuals cannot afford the basic necessities for existence (prevalent in developing countries)

Question 21

what is relative poverty ?

Answer 21

where households incomes is a certain % less than the medium household in the economy

Question 22

what is the poverty cycle, how does it cause problems ?

Answer 22

Low economic growth -> low wages -> low saving -> low investment -> low levels of education and healthcare -> low levels of human capital -> low productivity

Question 23

what are some policies to Alleviate Poverty ?

Answer 23

. reducing protectionist policies (encourages economic growth)

. investing in supply-side policies (education)

. state benefits (welfare payments)

. progressive taxation

. minimum wage

Question 24

what is the Laffer Curve ?

Answer 24

a diagram showing how as taxes are increased, tax revenue will also increase up until a certain point, once its reached that point it will fall (tax revenue), due to the disincentives of a higher tax

Question 25

What is the evaluation of wage differentials ?

Answer 25

+ incentives to gain skills, training, higher qualifications (leading to higher productivity) + trickle down effect (jobs, spending, greater tax revenue, increased welfare payments) —————————————— - income inequality (poverty, leading to greater government spending e.g. unemployment benefits, large income inequalities lead to greater saving less mpc, leading to lower growth) - negative externalities (e.g. crime, costs the government £70,000 a year to keep a prisoner in prison) - trickle down effect may not occur (Risk of gov failure, SR vs LR, compare costs vs benefits)

Question 26

What is horizontal equity ?

Answer 26

Those with the same incomes are taxed the same.

Question 27

What is vertical equity ?

Answer 27

Higher income earners are taxed more (progressive income tax system)

Question 28

What are the main causes of poverty ?

Answer 28

1) unemployment (cyclical, structural) 2) poor education and skills (Low MRP) 3) poor health/healthcare (can limit productivity) 4) wage differentials (relative poverty)

Question 29

What are the reasons against a national minimum wage ?

Answer 29

- unemployment (structural), dependent on PED for labour - youth lose out on employment most (low skills, experience) - costs to business (shutting shown, lack of competitiveness)

Question 30

What are the benefits of a national minimum wage ?

Answer 30

+ Poverty alleviation + Reduced wage differentiations + Incentive to work (reduced voluntary unemployment) + Increased productivity + Incentive for firms to boost human capital (increased training to make most of employee costs)

Question 31

What is the theory of the Ladder curve ?

Answer 31

Arthur Laffer’s theory states that, increasing taxes will increase tax revenue up until a certain point. Increasing taxes beyond this point will lead to a fall in tax revenue.

Question 32

What are the 3 reasons why Arthur Laffer belived tax revenue would fall if taxes were increased too much ?

Answer 32

. Disincentives to work harder —> less reward . Emigration to country’s with low tax burdens . Tax evasion/ avoidance

Question 33

What are some government policies to redistribute income/wealth ?

Answer 33

. Taxation (progressive, regressive) - reduce incentives (laffer curve) . Welfare payment (benefits) - poverty trap (reduce incentive to work) . Minimum wages - unemployment (structural)

Question 34

What is the Universal Basic Income (UBI) ?

Answer 34

A welfare Policy that guarantees a monthly income to everyone in the population regardless of their current income, employment or other factors. (Covers basic needs) (Unconditional) Funded by government tax payer

Question 35

What are the pros of UBI ?

Answer 35

+ Supports the unemployed (increase living standards) + always an incentive to work + everyone eligible

Question 36

What are the cons of UBI ?

Answer 36

- can encourage laziness / living off benefits - highly costly to the state (opportunity cost associated) - inflation concerns (Injection in money supply)

Question 37

What is a wealth tax ?

Answer 37

A tax on an individuals net worth or assets, rather than income. (E.g. savings, property, financial assets) —> progressive

Question 38

What are the pros of wealth tax ?

Answer 38

+ big revenue earner for GOV + reduce wealth/income inequality + can promote an efficient allocation of resources

Question 39

What are the cons of a wealth tax ?

Answer 39

- discourages investment, income generating activity and growth - risk of emigration (loss of income) - may impact specific demographic groups significantly (e.g. farmers, whose income is largely dependent on their assets that generate the income)