Unit 12

Question 1

Define equality

Answer 1

Equality in economics is the way the economic outcomes for different people in society are the same.

Question 2

Define Equity

Answer 2

Equity in Economics is about fairness in terms of everyone in society having an equal opportunity to achieve an economic outcome.

Question 3

What is unequal distribution of wealth

Answer 3

Means that a greater proportion of the income of the economy goes to the richest households than the rest of the population.

Question 4

What is unequal distribution of income

Answer 4

Means that a greater proportion of the value of assets in a country is owned by the richest households compared to the rest of the population.

Question 5

What is the lorenz curve

Answer 5

Lorenz curve shows degree of income inequality in an economy

Question 6

What is the gini coefficient

Answer 6

It has a value between 0 and 1, if there were perfect income equality it would be 0, the larger the gini coefficient, the more the income inequality

Question 7

how to calculate gini coef

Answer 7

area a/a+b

a=area between diagonomal and lorenz curve
a+b=entire area under diagonal

Question 8

what is poverty

Answer 8

inability to satisfy minimum consumption needs.

Question 9

what is absolute poverty

Answer 9

situation where a person or family does not have enough income to meet basic human needs.

Question 10

what is relative poverty

Answer 10

Concept that compares the income of individuals or households in a society with median incomes. it is closely related to how equally or unequally society’s income is distributed among its total population.

Question 11

what is poverty line

Answer 11

income level that is considered minimally sufficient to sustain a family in terms of food, houseing, clothing, meidcal needs and so on.

Question 12

what are the different ways of measuring poverty

Answer 12

Poverty lines
Multidimensional Poverty Index (MPI)
minimum income standards

Question 13

what is MIS

Answer 13

lowest income needed for an individual or family to meet their basic living costs and participate in society. helps government make decisions about policies to deal with poverty, and help reveal important information about;
-The number of people living below the minimum income required to buy the essentials
-relative contribution of each item in the basket to households’ abilities to acheive MIS
-how MIS changes over time

Question 14

What is MPI

Answer 14

Multidimensional poverty index measures poverty in three dimensions; Health, education and living standards. each of these dimensions is intended to reflect deprivations (essential things that people do not have)

Health:
Child mortality
Nutrition

Education:
Years of schooling
School attendance

Living standards:
Cooking fuel
Sanitation
Drinking water
Electricity
Housing
Assets

MPI has value from 0 to 1, with the higher the MPI the greater the poverty
To be considered poor, people must be deprived of at least 1/3 of the indicators above.

Question 15

What are the difficulties in measuring poverty

Answer 15

Measurement problems:
-Income as a measurement is incomplete since it doesn’t consider wealth or savings, which can provide a safety net.

-Subjectivity in household surveys can skew results due to varied personal perceptions of poverty.

-Homeless populations and institutional residents are often omitted, leading to underestimates of poverty levels.
Freelancers or those with irregular income streams may be misrepresented, resulting in over or underestimates.

-Cost of living differences between urban and rural areas are not always accounted for, which can lead to misleading national poverty lines.
Urban areas typically have higher living costs; thus, poverty in these areas might be underestimated if a standard threshold is applied nationally.
National poverty lines can exclude urban poor who, despite income, can’t afford basic needs due to higher living expenses.

-Poverty lines show how many people are below a certain income level but don’t reflect the depth or severity of their poverty.
This lack of granularity means that the extent of poverty (how far below the line people are) is not captured.
Situations where many are slightly above the poverty line versus far below can appear similar in statistics but are quite different in reality.

Overestimation or underestimation of the national poverty line;

-Governments may manipulate poverty line estimates for political or financial gain.
Overestimation can lead to a belief that more people fall below the poverty line than actually do, potentially to garner more international aid.

-Underestimation results in fewer people classified as poor, which may influence governmental budgeting and policy priorities

Question 16

Causes of economic inequality and poverty

Answer 16

Disparities in property ownership can create income inequality; those without property pay rent instead of collecting it, potentially leading to poverty.

Inequality of Opportunity:

Unequal access to quality income, education, employment, and healthcare restricts social mobility.
Factors like family background, education, gender, ethnicity, and social class affect opportunity.
Children from wealthy families often receive better education, leading to high-paying jobs and the continuation of the cycle.

Resource Ownership:

Low-income households typically lack capital, relying on low-paid labor for income.
Wealthy households often have assets like property and stocks, securing additional income streams.

Human Capital:

High-income individuals usually work in high-skilled, profitable sectors and command higher wages due to scarcity and bargaining power.
Low-income individuals often hold low-skilled jobs with lower wages and less profit for the employer.

Discrimination:

Employer discrimination based on ethnicity, gender, age, and social status can lead to wage gaps.
Educational discrimination restricts access to quality higher education for ethnic minorities and low-income students.

Status and Power:

Wealthy individuals use their resources for political influence by running for office or lobbying, which is challenging for low-income individuals.
The wealthy can finance political campaigns and policy decisions that benefit their interests and organizations.

Government Policies:

Policy decisions like tax cuts, typically favor the wealthy, as they pay more tax, and don’t benefit the poor significantly.
Spending cuts in public services and deregulatory market policies disproportionately harm low-income households.

Globalization:

Global competition tends to favor low-cost production, pressuring high-wage countries and potentially reducing wages.
This competition can increase income inequality and contribute to poverty by driving down wages and job security.

Unemployment:
No jobs= no money, especially bc of technological change for example, which will remove low skilled labour

Question 17

Impact of income and wealth inequality

Answer 17

Economic Growth:

Income and wealth inequality stifle growth as it limits investment in human capital, with the poor often unable to afford quality education, resulting in a less skilled workforce.

High-income groups tend to save more and spend less on consumption, which can lead to a lower flow of income in the economy and reduced demand, slowing down growth.

Wealth concentration in the hands of a few means that influential individuals can shape economic policies to their benefit, potentially at the expense of overall economic growth.

Significant wealth in few hands may deter sound government investment in public goods and services, essential for broad economic development.

The diversion of financial resources from domestic to international markets by the wealthy can lead to underinvestment in local economies and infrastructure.

Standards of Living:

High inequality is linked to lower living standards due to increased health issues, substance abuse, and poor nutrition.
Reduced access to quality education and healthcare perpetuates a cycle of poverty.

Greater inequality is associated with higher infant, child, and maternal mortality rates due to inadequate access to nutrition and healthcare.

Social and Political Stability:

Significant wealth disparities lead to divided societies with different interests, increasing the risk of social unrest.
The wealthy having more political influence can exacerbate inequality, as they can shape tax and social benefits policies to their advantage.

Growing inequalities may lead to social instability as perceptions of inferiority and dissatisfaction among lower-income groups intensify.

Question 18

What are tax used for?

Answer 18

Direct and indirect tax can be used to redistribute income by taxing people on higher incomes more than those on lower incomes and then using the tax revenue to pay for public services and welfare payments that support lower-income households.

Question 19

What is proportional taxation

Answer 19

as income increases, the fraction of income paid as taxes remains constant; there is a constant tax rate.

Question 20

What is a progressive taxation

Answer 20

as income increases, the fraction of income paid as taxes increases; there is an increasing tax rate.

Question 21

What is regressive taxation

Answer 21

as income increases, the fraction of income paid as taxes decreases; there is a decreasing tax rate.

Question 22

Problems of using tax to reduce inequality

Answer 22

High taxes on high earners may discourage work and entrepreneurship, potentially impacting job creation for lower-income workers.

Increasing indirect taxes, like VAT and duties on consumer goods, disproportionately affects the poor as they spend a larger share of their income on these taxes.

Excessive marginal tax rates could lead to decreased tax revenues as the wealthy might use tax avoidance strategies or move to lower-tax regions.

Higher indirect taxes can inflate the cost of goods, leading to price increases that disproportionately harm low-income families.

High national tax rates can reduce a country’s competitiveness, deterring foreign investment and increasing costs for domestic businesses, which may adversely affect job opportunities for those with lower incomes.

Question 23

Other policies to improve equality, equity and reduce poverty

Answer 23

Education and Training Policies:

Implement free primary and secondary education, ensuring legal mandates for school attendance to benefit all children.

Develop support programs for literacy and numeracy to aid low-income families and their children while in school.
Expand funding for higher education accessible to low-income individuals, allowing for the attainment of qualifications for skilled jobs.

Provide state-funded employment training programs to assist low-income individuals in entering and advancing in the workforce.

Healthcare Provision:

Offer extensive healthcare services to all, supporting the poorest and fostering economic opportunities.

Prevent poverty traps by mitigating the high costs of healthcare that low-income families might otherwise have to pay, ensuring they can afford other essential services.

Improve work productivity and reduce work absenteeism by ensuring good health among low-income households, including caretakers of dependents.

Government Intervention in Markets:

Minimum Wages and Price Controls

Minimum wage laws set a legal floor for wages, potentially increasing income for low-income workers and possibly leading to greater employment.

Governments may also use price ceilings to keep costs of essential goods like food and rent within reach for low-income groups.

Price floors can be established for agricultural products to ensure farmers receive sufficient income, which can result in higher market prices to support farmers’ earnings.

These interventions can lead to market inefficiencies and a potential loss of economic welfare, as they may disrupt the balance of supply and demand.

Transfer Spending:

Redistribution of tax revenue to low-income households via benefits such as unemployment, housing, and disability support.

Capital Spending:

Government investments in infrastructure, like transport and high-speed broadband, increase access to jobs and education, aiding low-income households.

Anti-Discrimination Laws:

Implementation of laws to prevent discrimination by employers and educational institutions based on gender, ethnicity, religion, sexual orientation, and age.

Question 24

Problems of using “other” policies to reduce inequality

Answer 24

Funding Challenges:

Financing government spending on social policies may lead to increased taxes, reduced spending elsewhere (opportunity cost), or increased national debt due to borrowing.

Inefficiency Criticisms:

Government spending is often criticized for inefficiency, with funds potentially directed towards politically motivated projects rather than on competitive or profitable ventures, affecting the effectiveness of programs like training schemes.

Bureaucratic Inefficiencies:

The large scale of government operations can result in diseconomies of scale, causing slow and ineffective decision-making, particularly in sectors like healthcare, education, and infrastructure.
Workplace Regulation Consequences

While workplace regulations aim to protect low-income workers, they can inadvertently raise business expenses, inflate consumer prices, and diminish the international competitiveness of an economy.