inequality Flashcards
(9 cards)
poverty
absolute poverty:
- absolute poverty - when people are unable to afford the most basic necessities e.g. food, clothing, water
- world bank defines anyone living on less than $2.15 a day as living in absolute poverty
relative poverty:
- relative poverty - people who are earning less than 60% of the median income
causes of poverty:
- corruption —> in the form of rent seeking (prioritising personal interests over the needs of society)
- subsistence agriculture —> produces just enough food for a family to survive —> don’t have extra crops to sell —> poverty
- born into poverty/raised by a single parent
- poor education/skills —> less qualifications —> less income —> poverty
- poor healthcare —> high absenteeism —> less income —> poverty
measuring income inequality
- lorenz curve - visual indicator
- gini coefficient - mathematical indicator
lorenz curve:
- y axis: C% of income, x axis: C% of population
- upwards sloping line - line of perfect equality
gini coefficient:
- A / A + B
- A = right of line of perfect equality and left of curve
- B = right of line of perfect equality
- closer to 0 - closer to perfect equality
- closer to 1 - wealth inequality
income and wealth
income and wealth:
- these are mutually reinforcing e.g. high incomes —> can purchase assets —> more wealthy
income:
- flow concept - measured over a period of time e.g. salary, profits
wealth:
- stock concept - measured at a given point in time e.g. property, cars, gold
reasons for differences in income and wealth:
within countries:
- age e.g. younger - less experience - less able to access high paying jobs
- education e.g. more qualifications - more able to access high paying jobs
- ownership of financial assets/property (inheritance)
between countries:
- literacy rates
- access to basic healthcare
policies to redistribute income and wealth:
- increase progressive tax
evaluation:
- brain drain
- reduced incentive to work harder - productivity may fall - decrease regressive tax
evaluation:
- tax revenue will fall - can cause a budget deficit (gov spending greater than tax revenue) - increase the level of benefits
evaluation:
- too reliant on benefits - reduced incentive to work
- costly to the government - minimum/maximum wage
evaluation:
- maximum wages - brain drain
- minimum wages - COP increases for firms - legislation e.g. anti discrimination laws, hiring/firing laws, maternity and paternity leave
evaluation:
- enforcement costs involved - opportunity cost - government spending on education/healthcare - increases productivity
evaluation:
- costly to the government
- time lags
significance of capitalism and kuznets curve
significance of capitalism:
- high skilled workers + business owners earn higher incomes - can purchase more assets - income and wealth are mutually reinforcing
- low-skilled workers earn low wages
kuznets curve:
- shows the relationship between economic growth and income inequality
diagram:
- x axis - economic growth, y axis - income inequality
- n shape
- initial growth - inequality increases
- later growth - inequality decreases
strategies influencing growth and development
market orientated strategies:
1. trade liberalisation (removal of protectionism)
- e.g. removal of tariffs - lower prices - exports increase - AD increases - positive multiplier effect
2. promotion of FDI
- investment by foreign firms - creates jobs - promotes growth
3. removal of government subsidies
- increases efficiency - LRAS/PPF shifts outwards
4. floating exchange rate
- more monetary policy autonomy - BOE can reduce IR to depreciate currency - increased export competitiveness - demand for exports increases - AD increases
5. micro finance
- loans given to small businesses - paid back over a long time and low interest (usually)
6. privatisation
- increases competition - productive efficiency - shifts LRAS
interventionist strategies:
1. development of human capital e.g. government spending on education
2. protectionism
3. managed exchange rate
- ER stability - investment and trade increases// can intervene to weaken currency
4. infrastructure development
- reduce geographical immobility
5. promoting joint ventures
- a larger firm may work with a smaller firm - leads to a transfer of knowledge - boosts human capital
- buffer stock schemes
- prices of commodity goods are very volatile
- government will try to minimise fluctuations through buffer stock scheme
advantages:
- stable prices help maintain farmers incomes - prevents structural unemployment
- price stability encourages more investment
- prevent excess prices for consumers - helps reduce food inflation
evaluation:
- cost of buying excess supply could become quite high for the government (opportunity cost) and may require higher taxes
- some goods cannot be stored in buffer stocks e.g. perishable goods
protecting farmers:
- a rise in supply leads to a fall in price
- to avoid this, the government will buy excess supply between Q1 and Q2 to maintain the target price at Tp
diagram:
- normal demand and supply diagram
- supply increases
protecting consumers:
- a fall in supply leads to a rise in price
- to protect consumers, the government will sell goods from their buffer stock which will increase supply and allow the target price to remain
diagram:
- normal demand and supply diagram
- supply decreases
other strategies:
1. industrialisation - the lewis model
- in order for growth and development to be seen, there needs to be a movement of labour from more primary sector jobs to more secondary sector jobs
2. development of tourism
- export revenue could increase
3. fair trade schemes
- protects farmers - ensures that they are paid fairly
- can lead to an increase in consumption
4. aid
- when one country donates money/resources to another
5. debt relief
- cancellation of debt
measures of development - HDI
HDI - human development index:
- literacy rate
- health
- GNI per capita
- if the value is closer to 1 there is better development in the economy
positives:
- broad measure - looks at 3 different areas whilst GDP only looks at a rise in real output
- recognised globally which allows for comparisons between countries
negatives:
- other factors are not considered as part of HDI e.g. quality of life, crime, poverty etc
- HDI figure could be deflated because the hidden economy is not included
other indicators of development:
IHDI:
- same as HDI but takes inequality into account
MPI:
- measure of poverty - looks at more than just income - shows how people are deprived in different areas of life e.g. health, education, and living standards
growth and development
- growth - a rise in RO/GDP
- development - improvement in living standards
- these are mutually reinforcing
factors influencing growth and development
primary product dependency and price volatility:
- volatile e.g. due to weather etc - countries such as ivory coast very reliant on exports of primary products such as cocoa - 45% of export revenue from cocoa and 65% of population work within agricultural sector - if price of commodity goes down - farmers lose income - this is because PED is inelastic - lower living standards
- volatile - hard to plan ahead - investment is low - low economic growth - low economic development
- evaluation - forward markets - farmers in advance can agree to sell their commodity for a fixed price in the future - easier to plan ahead - more investment - AD increases
- dutch disease - increase demand for exports - increase demand for currency - appreciates - SPICED - other exports are less price competitive (shows how boom in 1 export sector can harm other sectors)
- prebisch singer hypothesis - countries that export commodities will experience a fall in TOT - YED for manufactured goods is more elastic than YED for commodities - as global incomes rise, demand for manufactures increases faster than for primary goods - developing countries suffer from falling export revenues - TOT worsens - harder to import things from abroad - lower living standards
savings gap - harrod domar model:
- developing countries - low GDP per capita - high MPC and low MPS - less savings - banks have less money to lend - less investment - causes AD and LRAS to fall
- evaluation - aid - e.g. clothing, food, water - individuals no longer have to spend income on basic necessities - have more money to save
foreign currency gaps:
- a foreign currency gap occurs when a country does not earn enough foreign currency from exports to pay for imports
- problematic as they can’t pay for essential imports such as medicine and raw materials
capital flight:
- when firms relocate and move their assets from one country to another - e.g. due to high tax (laffer curve)
demographic factors:
- ageing population - less productive
- youthful population - more productive
- if the dependency ratio is high it means there is less money available for savings - many developing countries have high dependency ratios
access to banking and credit:
- access to credit and banking including microfinance - small loans given to start up/small businesses - low interest rates and longer to pay back - gives small firms the opportunity to grow - these businesses can invest - investment is a component of AD…
- developed countries - well-established banks - individuals can easily save - banks have money to lend
- developing countries - banking sector is often underdeveloped - don’t save due to lack of access or trust - banks don’t have money to lend
debt:
- hinders growth and development
infrastructure:
- expenditure on infrastructure e.g. transportation links - geographical immobility of labour falls - quantity of labour increases - shifts LRAS
- expenditure on transportation - more efficiency - reduced COP for firms - shifts LRAS
education and skills:
- government spending on education - skilled workforce - increased human capital - reduces occupational immobility of labour - quality of labour increases - LRAS shifts
absence of property rights:
- ownership of property - positive wealth effect occurs
- in developing countries, individuals are unable to gain access to property rights, growth will be hindered
impact of non economic factors
- corruption - rent seeking behaviour
- war/conflcit
- natural disasters
awareness of international institutions and NGOs
world bank:
- give out loans to poorer countries
- helps with development projects e.g. roads and schools
IMF:
- promotes financial stability and helps countries in crisis
NGOs:
- non profit organisations that give aid directly to people e.g. water and education
- oxfam and water aid
