The distribution of income and wealth: poverty and inequality

Question 1

What is the difference between income and wealth

Answer 1

• Income = flow of money received
• Wealth = stock of everything of value
• Distribution = how its divided among groups of people

Question 2

What are the reasons for differences in income and wealth between groups of people

Answer 2

• Age = more accumulation, greater MRP
• Education = type of job, income
• Financial assets = inheritance, pension
• Property = home, inheritance
• Wage differentials = state benefits

Question 3

What is the lorenz curve

Answer 3

How far from equal distribution income actually is (visual representation of income equality)

Question 4

What is the gini coefficient

Answer 4

• A = area between equal distribution line and actual distribution of income line on lorenz curve
• B = area beneath equal distribution of income curve on lorenz curve
• Gini coefficient = A / (A+B)
• 0 = perfect equality
• 1 = perfect inequality
  (numeric representation of income equality)

Question 5

What are the problems with poverty

Answer 5

• Opportunity cost
• Lost output
• Govt spending on welfare provisions
• Less spending in economy due to lack of disposable income
• Slow GDP growth
• Lost self-esteem, isolation, poor health

Question 6

What are the government policies to reduce poverty

Answer 6

• Taxation = progressive/ regressive
• Benefits = universal/ means tested
• Min/max wages
• Legislation = discrimination, wages, annual leave, workers rights
• Govt spending = healthcare, education

Question 7

What are the problems of government policies to reduce poverty

Answer 7

• Tax = distort wealth incentive, reduce consumption, fiscal cost
• Benefits = govt cost, incentivise unemployment
• Min/max wages = impact youth, decrease entrepreneurial incentive
• Legislation = business cost, enforcement cost, govt failure
• Govt spending = expensive, lag time

Question 8

What is the laffer curve

Answer 8

Relationship between tax rate and tax revenue
- Increasing tax will increase tax rev up until a certain point but will then start to fall due to:
–> Disincentive to work/ be entrepreneurial
–> Emigration
–> Tax evasion (illegal)
–> Tax avoidance (legal)