U202 Distribution of Income and Wealth

Question 1

Earned income

Answer 1

Earned income Comes from households selling their labour or supplying intellectual talents and physical power to businesses

Question 2

unearned income

Answer 2

Unearned income (aka passive income) Includes rent and interest. It is received for allowing others to use your property or savings, or sometimes it represents a reward for risk.

Question 3

gross income

Answer 3

Gross Income: The sum of all incomes received

Question 4

disposable income

Answer 4

Disposable Income: Gross income minus taxes and other essential living expenses i.e money left available for spending

Question 5

transfer income

Answer 5

Transfer Income: Money from welfare payments and cash benefits from government for nothing in return

Question 6

fringe benefits

Answer 6

Fringe benefits: Goods/services received in lieu of money eg free house/car etc

Question 7

Equivalised Household Income

Answer 7

Equivalised Household Income (EHI): Income adjusted to account for household size and composition

Eg EHI would be different for someone living alone vs someone with a family of 4, despite same income.

Question 8

how is wealth measured

Answer 8

Wealth is measured by the “assets” that are owned, such as property, cars, belongings, investments and cash/savings, as well as income.

Question 9

relo b/n income and wealth

Answer 9

(Earned) income is used to buy assets (wealth)

And;

Wealth is utilised to provide (unearned) income through renting/leasing/interest/dividends/return from investments etc

The goal of most rich people: End up with more unearned income and less earned income

i.e retire early/no need to work anymor

Question 10

income distribution

Answer 10

Income distribution refers to the way the income ‘cake’ is shared or divided between individuals, genders, groups or regions.

Question 11

what does income distribution affect

Answer 11

This pattern of distribution affects living standards and may be fairly even (i.e each group shares the same proportion of the cake) or uneven.

Question 12

lorenz curve

Answer 12

The Lorenz curve is a graphical representation of the distribution of income or wealth in a society.

A straight line = absolute equality.

The further the line curves from the straight line, the larger level of inequality

Question 13

gini coeffcient

Answer 13

Gini Coefficient: a number between 0 and 1 that indicates the level of equality in the income distribution using this formula:

Question 14

how does the gini coefficient measure inequality

Answer 14

The larger the Gini Coefficient, the greater the inequality in income distribution
i.e.
Gini Coefficient of 1 would imply there is total inequality in income distribution
Gini Coefficient of 0 would imply total equality in income distribution

Question 15

what gini coefficient is ideal

Answer 15

In Australia, a Gini Coefficient of 0.3-0.4 is seen as ‘ideal’

Question 16

how else does the ABS measure inequality

Answer 16

Apart from measuring income inequality by quintile, the ABS also measures other aspects of income distribution.

inequality:
by state/territory
by gender
by occupation
intergenerational

Question 17

What is the relationship between consumption and living standards?

Answer 17

Increasing fair distribution of income and wealth for those in poverty will increase consumption per capita in a nation, which will improve a nation’s overall living standards

Question 18

Is Income Inequality an important issue to address? Why or why not?

Answer 18

addressing income inequality is crucial because it affects social stability, economic growth, and overall well-being. High inequality can lead to social unrest, limit access to education and healthcare, and reduce social mobility.

Question 19

inequality is bad
Impact on Society:

Answer 19

Impact on Society:
Poverty and inequality creates a social divide
This reduces cohesion with society
This erodes society’s non-material wellbeing overall

Question 20

inequality is bad
Impact on Productivity:

Answer 20

Impact on Productivity:
Poverty and inequality leads to poorer educational and health outcomes,

This lowers efficiency of labour resources

This lowers potential output, incomes and prosperity

This stops firms gaining economies of large-scale production and slows economic growth

Question 21

inequality is bad
Impact on Economic stability (part 1)

Answer 21

Impact on Economic stability (part 1)
High income earners have larger impacts on spending on the economy than lower income earners

For example, if they spend less of their income, their impact on slowing down the economy is greater

Governments could try to encourage spending by lowering interest rates.

But this increases demand for things such as housing, causing prices to rise (inflation).

Question 22

inequality is bad
Impact on Economic stability (part 2)

Answer 22

Lower income earners now have to pay more for rent and mortgages.

Governments could try to rein in this inflation by increasing interest rates (thus reducing demand)

But this causes more unemployment and higher mortgage costs, causing low income earners to struggle even more or even default on their mortgage payments

Question 23

inequality is bad
Impact on what is produced:

Answer 23

Inequality causes market failure due to the underproduction of socially beneficial and necessary goods and services

This is due to lower incomes with less spending power being excluded from market decisions
While those who have higher incomes spend more (i.e contribute more in market demand

Question 24

inequality is bad
Impact on what is produced 2:

Answer 24

Impact on what is produced:

As a result they distort the allocation of resources through overproducing luxury goods and services such as cars, yachts and high-end housing

At the same time, they underproduce necessities like affordable healthcare, housing, education, public transport and legal services, unless there is government interference

Question 25

inequality is good Impact on productive efficiency:

Answer 25

Impact on productive efficiency: Inequality may increase incentive to work harder, improving efficiency. This boosts productive efficiency, productivity and economic activity Increases incentive to gain improved skills, education and job position, potentially escaping the poverty cycle and improving employability, higher incomes and improved living standards

Question 26

inequality is good Impact on population distribution

Answer 26

Increases the incentive to relocate to another geographic area to meet labour shortages, reducing urbanisation, supporting rural areas and lifting overall living standards

Question 27

inequality is good Impact on innovation and growth

Answer 27

increases incentives for businesses to take risks and expand their operations and encouraging innovation. This boosts productive efficiency, productivity and economic activity Increases the levels of savings needed to finance higher levels of investment (i.e more money from high income earners gets saved in bank than if it was evenly distributed, benefiting even the poor in their business investments) Rewards households and individuals who are successful, creating incentives to work hard to achieve higher incomes

Question 28

1. Progressive Income Tax system

Answer 28

Progressive tax system on personal income that taxes higher income earners more and lower income earners less. They take money from the wealthy that can then potentially be used to pay for welfare and free or subsidised public services. In response to the criticisms that the proposed system was not as equitable as it could be, the Albanese Government modified the tax changes.

Question 29

2. Proportional Tax System

Answer 29

Direct taxes where the tax is the same proportion of the income regardless of the amount. Eg; Proportional tax on business income where all companies pay the same rate of tax on all profits. Eg company tax is 25-30% of all profits These have a fairly neutral effect on the distribution of income as not all high income earners are business owners.

Question 30

3. Regressive (Indirect) Tax system (and exemptions)

Answer 30

3. Regressive (Indirect) Tax system (and exemptions) Indirect taxes are same level of taxes on goods and services that everyone pays, regardless of income level (e.g. the GST, excise taxes on petrol, alcohol and tobacco, the former carbon tax) These are mostly regressive and actually increase inequality, because lower income earners would pay a higher proportion of their income than higher income earners. To fix this issue, necessities are exempted or the taxes are only levied on luxury items purchased mainly by higher income earners.

Question 31

4. Cash Benefits

Answer 31

4. Cash Benefits Cash benefits (eg disability, welfare, AusStudy, NewStart, pension, family tax benefits). These are Means tested: those with high enough assets/income cannot receive them This increases disposable income of most needy. Amount provided needs to be balanced: Too litle is not enough; Too much gives less incentive to work ones way out of poverty

Question 32

5. Free/subsidised services

Answer 32

5. Free/subsidised services The budget is also used to fund and provide free or subsidised government services (e.g. merit goods and services like public health, education, housing, transport) to the needy at an affordable price, improving their accessibility.

Question 33

6. Retirement Funding (Superannuation)

Answer 33

6. Retirement Funding (Superannuation) The government encourages superannuation or retirement savings. Currently all employers must contribute an additional 10.5 per cent of employees’ wages into a superannuation fund on behalf of each employee. This should allow people to retire with more wealth and income, reduce their reliance on the pension (and budget from taxes) and enjoy improved access to goods and services.

Question 34

7. Economic Stabilisation (Targeted Unemployment & Inflation Rate)

Answer 34

The government tries to lower unemployment and keep inflation in check (i.e economic stabilisation) using appropriate budgetary policies such as taxation & changing their spending By keeping unemployment and inflation rates lower, the purchasing power of family incomes and general living standards are better protected. Equity is improved.

Question 35

8. Minimum Wage

Answer 35

8. Minimum Wage Through the Fair Work Commission, the government also sets the minimum wage to ensure that low-paid workers have reasonable wages, are not exploited and can have access to basic goods and services.

Question 36

9. Antidiscrimination Laws

Answer 36

9. Antidiscrimination Laws The government has also passed anti-discrimination laws to increase fairness when people apply for jobs, so that their age, gender and race do not prevent them from gaining employment or seeking promotion.