Topic 7 - The Distribution Of Wealth And Income

Question 1

Difference between wealth and income

Answer 1

Income is a flow concept

Wealth is a stock concept

Question 2

Income is an inflow of money from:

Answer 2

Salary
Benefits
Investments
Dividends
Interests

Question 3

What is capital gains tax

Answer 3

Taxes on your capital gains (profits from capital assets such as stocks, real estate,etc. )

Question 4

Give examples of “unearned” incomes:

Answer 4

Benefits
Dividends
Interests
Rent
Investments

Question 5

Explain why high income leads to more opportunity for income

Answer 5

When you already have a flow of income, you can easily use this leftover spending money and use it to invest which can generate more income.

Question 6

Explain why income and wealth distribution is increasing even though Everyone is ‘getting richer’.

Answer 6

the rich are getting richer at a more rapid rate than the poor are getting richer bringing across more uneven distribution

Question 7

Define relative and absolute poverty

Answer 7

Relative poverty is if you earn below 60% of median income

Absolute poverty is living on less than 2 dollars a day

Question 8

Factors affecting distribution of income:

Answer 8

— factors of production - earnings for labour have not risen as fast as the earnings from land and entrepreneurship (Widens gap of INCOME distribution )

— Earned vs Unearned income - Unearned income from money invested provides multiple sources of income which therefore widens the gap of INCOME distribution

— Salary differentials - gap between bottom and top earners has also been widening causing even more uneven distribution

— Migration - freer movement of goods and labour have widened the gap of income distribution by providing lots of low paid jobs in manufacturing and other low skill jobs.

Question 9

Factors affecting distribution of WEALTH

Answer 9

Inheritance and luck - Old money refers to money being passed down from generations. New money refers to money being generated by entrepreneurs and taking risks that pay

Taxation - both income and wealth are taxed in order to redeistribute wealth more evenly in a way which reduces the gap between the rich and poor

Pension assets - private pensions allow for the rich to gain even more wealth while the poor do not gain as much widening the distribution of wealth.

Capital gains - Benefitng from an increase in the value of an asset such as a house is rarely seen in poor people. This is because the rich are the ones who own these assets and therefore increase their wealth. This once again widens the gap.

Question 10

What are the types of unemployment:

Answer 10

Frictional - temporary while switching jobs

Cyclical - driven by current economic state

Seasonal unemployment - people who work seasonal jobs experience these

Structural unemployment - caused by the closure of an industry/large firm leading to less demand for labour hence created a gap of unemployment.

Immobility of labour - not being able to move to an area where a job is available due to family ties, financial struggles, etc.

Question 11

What are ways we can measure distribution of income and how de we use them

Answer 11

Lorenz curve shows the cumulative % of total income and what percentage of households from richest to poorest make that percentage of money

You can then use the gini coefficient (Area of A / Area of A + B) . The smaller to 0 the more equally distributed it is

— Kuznets curve

Question 12

What are the consequences of unequal distribution of wealth/income

Answer 12

Countries with the widest gaps between rich and poor are often countries with the most social/health problems

Inequality boosts crime rates, lowers life expectancy, increases imprisonment rates, etc.

High poverty rates lead to deprivation

Question 13

Explain what the unemployment trap is

Answer 13

The unemployment trap is the discouragement of the unemployed to work because working a low income job but losing the benefits would mean they receive relatively similar incomes

Question 14

What are the effects of poverty in the UK

Answer 14

Educational deprivation

health deprivation

Poverty in communities — high crim rates

Question 15

What is fiscal drag

Answer 15

Fiscal drag is the instance where inflation causes taxpayers income into a higher tax bracket and therefore widening the gap of wealth/income distribution

Question 16

What is the poverty/earnings trap

Answer 16

When you are in a low income job that has high enough income to put you into the tax brackets and therefore strips you off any welfare benefits as well as forcing you to pay taxes leaving very little spending money left over.

Question 17

What is the triple lock

Answer 17

Causes pensions to rise by either 2.5%, Average earnings % or inflation % (whichever is highest.)