the distribution of income

Question 1

what is wealth

Answer 1

a stock of assets owned by an individual, firm or country
examples of wealth
- houses
- shares
- buildings
- land

Question 2

what is income

Answer 2

income is a flow of money going to factors of production (wages/ salary is going to labour, rent is income going to land)
income may be earned through (through employment) or unearned

Question 3

what is meant by the distributon of income

Answer 3

means how income is divided between different groups in society

Question 4

what is the distribution of wealth

Answer 4

how wealth is divided between different groups in society

Question 5

what is the link between income and wealth for the rich

Answer 5

virtuous circle

Question 6

what is the link between income and wealth for the poor

Answer 6

vicious circle

Question 7

explain the virtuous circle for the rich

Answer 7

if you have a high income you are more likely to have money left over after living costs
you can invest this and thereby gain interest

Question 8

explain the vicious cycle for the poor

Answer 8

if you are poor, have no saving and a low income, you are likely to end up borrowing money
repaying a loan with interest, makes it even harder to save or cover living costs

Question 9

what are the factors influencing distribution of wealth and income

Answer 9

when an economy grows rapidly the gap can become wider
although everyone is becoming richer in absolute terms, the rich gets richer more quickly than the poor gets richer

Question 10

recall the factors influencing distribution of income

Answer 10

wage/ salary differentials
market structures
govt policy
age
household consumption
globalisation and migrations of workers
inequality in levels of wealth
high levels of education
factors of production
skills and qualifications

Question 11

how does factors of production affect the distribution of income

Answer 11

earning from labour have not risen as fast as earning from land and entrepreneurship widening the gap wages haven’t risen as much as land owners earning from rent

Question 12

how does earned vs unearned income affect the distribution of income

Answer 12

income is not one homogeneous item and the factors determining wage inequality are different from the factors determining differences in unearned income
unearned income tends to go hand in hand with wealth

Question 13

how does wage differentials affect the distribution of income

Answer 13

differential here means the difference between top-earners and bottom earners

Question 14

how does globalisation and migration of workers affect the distribution of income

Answer 14

the freer movement of goods and labour have arguably widened the gap between rich and poor
lower paid workers in industries such as manufacturing or call centres are aware that they are in competition now with cheap labour in other exerting a downward pressure on their wages
by contract executive justifying their high salaries through international comparison, suggesting that they will move abroad if they are not paid a competitive rate for their skills

Question 15

what are the four components to an individuals total net worth, stated by the office for national statistcs

Answer 15

net property wealth (your house)
net financial wealth (your cash)
physical wealth (your car)
private pension wealth (your pension)
the relative size of each of these elements varies greater when you compare rich and poor

Question 16

what are the factors influencing the distribution of wealth

Answer 16

propensity to save
government policy
private pensions
capital gains
inheritance traditions
inequality of wealth
inequality of income
gifts and luck
skills and qualifications

Question 17

what is the private pension assets and how does it affect the distribution of wealth

Answer 17

pension pension assets accounted for 37% of total household wealth equalling the proportion of wealth from property in 2010-2012
the poor have not traditionally had private pensions, either through lack of access to workplace schemes or lack of spare cash to invest
state pensions arent included as you dont have a lump sum rather count as a flow concept giving a monthly income
the automatic enrolment of workers into employers pension schemes is a policy introduced to address this

Question 18

how does inheritance, gifts and luck affect distribution of income

Answer 18

wealth distribution is in part accounted for by ‘accidents of birth’ and luck
old money is a label that refers to money that has been inherited/passed down rather than earned
new money refers to wealth generated by entrepreneurs and others who got lucky, take risks that pay off or win the lottery
so having old wealth can improve your chances of generating new wealth

Question 19

how does taxation affect the distribution of income

Answer 19

both income and wealth can be and are taxed
in the UK the greater part of tax revenue comes from taxation on income than on wealth
even where is taxed the wealthiest are often able to avoid losing too much of their wealth because they have the means to employ clever accountants who know the loopholes

Question 20

what are the consequences of wealth inequality

Answer 20

some may have to live in low quality homes or move house frequently
asset bubbles and property speculation
the hinderance of social mobility via the wealthy affording better education, health, cultural goods
child poverty and pensioner poverty
wealth creates incomes via interest, rent and dividends , causing more income inequality
can be argued that only the wealthy can afford to take big risks as entrepreneurs so have access to high risk/ reward opportunities
envy and jealousy leading to social problems
intergenerational inequality arising from property inequality

Question 21

what are the consequences of income inequality

Answer 21

a sense of unfairness
impact on aggregate demand, economic growth and performance
impact on social indicators such as crime, education, physical health, mental health

Question 22

recall the policies being used by UK govt to combat the uneven distribution of income

Answer 22

inheritance tax
income tax
capital gains tax
national insurance
restrictions on second homes
mansion tax
forcing independent schools to charge VAT

Question 23

why might wealth and income inequality be desirable

Answer 23

theres an argument that some degree of income and wealth inequality is inevitable in a market economy and perhaps desirable as it may provide incentives and allocate resources effectively

Question 24

what is the trickle down effect

Answer 24

wealth and income inequality can be seen as a not so serious issues because of the trickle down effect
the belief that if high income earners gain an increase in salary, then everyone in the economy will benefit as their increased income and wealth filter through to all sections in society

Question 25

what happens if the richest gain an increase in wealth

Answer 25

extra wealth will cause an increased demand for goods and services causing higher employment and rise in wages higher wages - multiplier effect or they may invest their increased wealth in new businesses which will create new jobs and increase incomes of those employed higher spending and investment will stimulate economic activity leading to a rise in tax revenues which can fund healthcare, education and welfare payments to the poor

Question 26

what are the criticisms of the trickle down effect

Answer 26

the wealthy have a high marginal propensity to save wealth has been saved in off shore accounts to avoid paying tax

Question 27

why has the distribution of income become more unequal in the uk

Answer 27

cutting top rates of tax (supply-side policy - the economy will grow faster) conservatives more likely to accept higher inequality privatisation and rise of executive pay fall in real value of benefits increase in % of single parent families increase in part time jobs

Question 28

what causes inequality of income between households

Answer 28

wealth inequality household composition level of skills and qualifications differences in earnings

Question 29

why are there differences between income of regions

Answer 29

industrial structure unemployment rates % of population on benefits educational standards resource endowment

Question 30

why may unequal distribution of income be good

Answer 30

wealthier people are likely to stay in the country and contribute higher GDP motivation for promotions - increasing MRP more entrepreneurs- new products take on extra work more regularly govt gets more tax revenue

Question 31

why may unequal distribution of income be bad

Answer 31

can lead to social problems such as: resentment robbery riots

Question 32

what are the causes of poverty

Answer 32

low levels of income unemployment dependency of others age govt policy - wealth creation and trickle down effect low levels of education and training country and/or region of residence family backgrund ill-health

Question 33

what are the effects of poverty

Answer 33

ill-health (including stress and mental health illness) limited education and training an thus poor job prospects lower productivity (for individual/economy) - lower MRP poorer lifestyle

Question 34

what policies can you think to reduce income/ wealth inequality and poverty

Answer 34

welfare benefits subsidised government services (benefits in kind) progressive taxation national minimum wage/ national living wage reduce unemployment encourage equality of opportunities in education and jobs legislation to protect the lowest paid workers switch to mean tested benefits decrease or increase in real value welfare benefits

Question 35

what are the pros of national minimum wage

Answer 35

boost low wages empowers the economically weak (especially against monopsonist) upward multiplier (AD) increase the labour supply increase the demand for labour

Question 36

what are the negative effects of the national minimum wage to reduce income inequality

Answer 36

increase in the costs of production (anti supply side policy) more unemployment downward multiplier therefore reduce the demand for labour disequilibrium and so increased unemployment

Question 37

how can you evaluate the use of the national minimum wage to reduce income inequality

Answer 37

effect of unemployment is dependent on elasticity of demand and supply of labour

Question 38

what is the pros of cutting the bottom rate of tax to reduce income inequality

Answer 38

reduce the poverty trap reduce benefit dependency increase the supply of labour upward multiplier increase income for ow paid cheap to administer

Question 39

what are the cons of cutting the bottom rate of tax to reduce income inequality

Answer 39

disincentivising productivity (greater returns for less MRP) progressive tax system is fair but does it lead to as much efficiency as flat rate or regressiv taxes may have to increase tax elsewhere to fund

Question 40

what are the pros of funding education and training to reduce income inequality

Answer 40

reduction in structural unemployment increases MRP reduces exploitation and discrimination increase social mobility increase labour occupational mobility supply side policy reduces costs of production

Question 41

what are the cons of funding training and education to reduce income inequality

Answer 41

uncertain outcomes expensive opportunities cost time lags

Question 42

what are the pros of the trickle down effect to reduce income inequality

Answer 42

wealthy economies have less absolute poverty entrepreneurs will invest and increase GDP entrepreneurs demand labour and so create jobs more emlpoyment will increase the scarcity of labour and so wages will rise

Question 43

what are the cons of the trickle down effect to reduce income inequality

Answer 43

increases in real GDP are disproportionately taken by the wealthy increasing disparity between high and low incomes

Question 44

what are the pros of increasing benefits to reduce income inequality

Answer 44

increase income for those on low incomes means tested gets to the most needy stops absolute poverty reduces relative poverty

Question 45

what are the cons of increasing benefits to reduce income inequality

Answer 45

incentive to not work reduce labour supply people may get into poverty trap expensive people cheat the system means tested so its beureacratic

Question 46

what are the benefits of using tax credits to reduce poverty

Answer 46

increases income of low income earners people are still encouraged to work

Question 47

what are the cons of using tax credits to reduce poverty

Answer 47

disincentivises higher wages as you may lose tax credit earning and losing tax credit seems like a huge increase in tax could reduce MRP

Question 48

how may free market economists view interventions by the govt to reduce poverty

Answer 48

they believe intervention is pointless in the long as its all about scarcity so to increase low wages you need to make labour scarce to do this - need a high demand for labour and for this you need to have free markets that exploit low wages as labour gets more expensive businesses will switch to capital and create unemployment

Question 49

what other measures could be used to reduce income inequality

Answer 49

reduce unemployment expenditure to encourage equality of opportunities in education and jobs subsidised govt services spending on social funds

Question 50

what are cash benefits

Answer 50

universal child benefits state pensions conditional benefits means tested welfare payments

Question 51

what are in kind benefits

Answer 51

education healthcare social housing employment training

Question 52

what are the problems with taxation systems

Answer 52

fiscal drag - when raises in tax thresholds in progressive tax systems dont keep pace with inflation

Question 53

what is the effect of fiscal drag

Answer 53

if wages prices and tax thresholds all rise at the same rate then your income in real terms remains the same however tax threshold arent linked to inflation rates so if the tax threshold doesnt increase you end up paying a higher proportion in tax and so becoming relatively poorer

Question 54

what is a poverty trap

Answer 54

where more working results in little increase in net income as earnings trap occurs where a persons income level is such that they become eligible to pay income tax but lose means tested benefits this can result in a marginal tax rate of 70%

Question 55

what is an unemployment trap

Answer 55

where working results in little increase in net income applies to those not in work who believe that they will lose more if they work both earning and unemployment trap are complicated by the black economy, where people dont declare income so that they can continue to claim benefits