Macro 18 - Poverty and Inequality

Question 1

Define the term absolute poverty

Answer 1

Absolute poverty exists when a person’s continued daily existence is threatened because they have insufficient resources to meet their basic needs such as food, shelter, clothing, access to clean water, sanitation facilities and education

Question 2

Define the term relative poverty

Answer 2

Relative poverty exists when a person is poor compared with others in their society

Question 3

What type of poverty is most poverty in developed countries?

Answer 3

Most poverty in developed countries tends to be relative poverty

Question 4

How is relative poverty measured?

Answer 4

People are considered to be in relative poverty if they are living below a certain income threshold in a particular country

Question 5

What are the different ways of reducing absolute poverty?

Answer 5

• Economic growth to generate higher income and output
• Foreign aid
• Increased provision of education
• Debt relief for countries
• Microfinance schemes
• FDI by multinationals into the country
• Remittances - where family members working overseas send wages home, this boosts GNI relative to GDP

Question 6

Define the term inequality

Answer 6

Inequality occurs when the distribution of income and wealth is unequal

Question 7

What is one way that inequality can be measured?

Answer 7

Quintile groups

Question 8

What are Quintile groups?

Answer 8

Quintile groups refer to fifths of the population in order of income

Question 9

What is a Lorenz curve?

Answer 9

A Lorenz curve is a curve which shows the degree of inequality of income in a society

Question 10

What goes on the x-axis of a Lorenz curve?

Answer 10

Cumulative percentage of population

Question 11

What goes on the y-axis of a Lorenz curve?

Answer 11

Cumulative percentage of income

Question 12

Draw a Lorenz curve with 3 curves including the line of perfect equality, slight inequality and much larger inequality

Answer 12

See page 7 in pack 18

Question 13

On a Lorenz curve how can we tell which curve shows the greatest amount of inequality?

Answer 13

The further away a curve is from the line of perfect equality, the more inequality there is

Question 14

What is the Gini coefficient?

Answer 14

The Gini coefficient is a statistical measure of inequality of income that works by comparing how distribution of income in a society compares to a society in which everyone earns exactly equal amount of income

Question 15

What does a Gini coefficient of 0 mean?

Answer 15

A Gini coefficient of 0 represents perfect income/wealth equality

Question 16

What does a Gini coefficient of 1 represent?

Answer 16

A Gini coefficient of 1 represents a highly unequal distribution with all the country’s income earned by a single person

Question 17

What is the formula used to calculate the Gini coefficient and what are the different variables?

Answer 17

Gini coefficient = A / A+B
- A represents the area between the diagonal line and the Lorenz curve
- B represents the area under the Lorenz curve

Question 18

What set of values can a Gini coefficient take?

Answer 18

The Gini coefficient will have a value between 0 and 1 with 0 representing absolute equality and 1 representing absolute inequality

Question 19

As the Gini coefficient gets bigger …

Answer 19

there is more inequality

Question 20

What can wealth inequality be explained by?

Answer 20

• Income inequality
• Wealth - wealth can lead to more wealth
• Chance/luck

Question 21

What are some policies used to alleviate poverty?

Answer 21

• Benefits
• State provision
• Progressive taxation
• Economic growth
• National minimum wage

Question 22

What is a progressive tax system?

Answer 22

A progressive tax system means that high earners pay a greater percentage of their income in tax than low earners

Question 23

What is a regressive tax system?

Answer 23

A regressive tax system means that low earners pay a greater percentage of their income in tax than high earners

Question 24

What is a proportional tax system?

Answer 24

A proportional tax system means that all earners pay an identical percentage of their income in tax

Question 25

What type of tax to direct and indirect taxes tend to be?

Answer 25

• Direct taxes tend to be progressive
• Indirect taxes tend to be regressive

Question 26

What is the general rule for tax bands?

Answer 26

The higher rate of income tax is only paid on the extra income

Question 27

What are the causes of wealth and income inequality?

Answer 27

• Education, training and skills
• Wage rate
• Strength of trade unions
• Degree of employment protection
• Pension entitlements
• Benefits
• The tax system

Question 28

What is capitalism?

Answer 28

Capitalism is an economic system based on private ownership of the means of production and their operation for profit. Characteristics central to capitalism include private property, capital accumulation, a market for labour, free trade exchange, a price system and competitive markets

Question 29

What is the difference between income and wealth inequality?

Answer 29

• Income inequality refers to the unequal distribution (flow) of income to households
• Wealth inequality refers to differences in the amount of assets that households own

Question 30

Why does capitalism generally lead to inequality?

Answer 30

Under capitalism:
- Workers with higher skills receive higher wages
- Workers with little to no skills receive little to no wage
This means that individuals with higher incomes will acquire more assets leading to higher levels of income whereas individuals with lower incomes will find it harder to acquire assets leading to wealth inequality as a result of income inequality