3.4.1.7 THE DISTRIBUTION OF INCOME AND WEALTH: POVERTY AND INEQUALITY

Define distribution of income

How the total income of an economy is shared among its population

Define distribution of wealth

How the total value of assets in an economy is shared among its population

Define income

A flow of money received by an individual or household over a specific period (wages, interest, dividends)

Define wealth

A stock of valuable assets owned at a specific point in time (savings, property, shares)

Explain the difference between income and wealth?

Income is the money you earn, while earth is the money you keep

What factors have contributed to the unequal distribution of income and wealth?

• automation and globalization (increased the demand for skilled workers)

• accumulation of wealth

• unequal access to quality education and training

How does "factors of production" influence the distribution of income and wealth?

The distribution of income depends on who owns the resources used to create pods and services

How does "the distinctions between earned and unearned income" influence the distribution of income and wealth?

Earned = money received from active work

Unearned = money derived from investments or assets

How does "wage and salary" influence the distribution of income and wealth?

Skills/education, experience, market conditions

How does "globalisation and international migration of workers" influence the distribution of income and wealth?

Causes low skilled jobs to move to countries with lower labor costs

• migration of workers can fill labor shortages

How is wealth distribution across the UK?

Highly unequal

• the richest 10% of households hold over half of the wealth

• the least wealthy 10% hold 16,500 or less

How does "the ability to benefit from capital gains" influence the distribution of wealth?

Weathly individuals own assets like stocks, real estate, businesses - these can increase in value

How does "private pension assets" influence the distribution the distribution of wealth?

Those in high paying jobs often have access to generous private occupational pension scheme eg. Employer contributions

How does "inheritance, gists and luck" influence the distribution of wealth?

The transfer of assets through inheritance allows wealth to remain concentrated within specific families

How does "wealth taxation versus taxation of income" influence the distribution of wealth?

If the tax system favors asset owners over wage earners, the gap in wealth distribution naturally widens over time

What does equality mean?

Sameness

What does equity mean?

Fairness

Define distribution of income

How the total GPD of a country is divided among its population

Define distribution of wealth

How the total value of assets is divided among the population

What are 2 causes of poverty in the UK?

Regressive effects of high inflation, unemployment

Define equality

Ensuring that every individual or group of people is given the same resources or opportunities

Define equity

Recognizing that each person has different circumstances and allocating the exact resources and opportunities needed to reach an equal outcome

Define horizontal equity

The economic theory that individuals with similar income and assets should pay the same amount in taxes

Define vertical equity

The principle that those with a greater ability to pay (higher income/wealth) should pay more in taxes than those with less

Define Lorenz curve

A graphical representation of the distribution of income or wealth within a population (a straight 45 degree line represents perfect equality - where 10% of people own 10% of wealth)

Define Gini coefficient

A numerical measure of inequality based on the Lorenz curve, typically expressed as a fraction between 0 and 1

• 0 = perfect equality (everyone has the same income)

• 1 = perfect inequality (one person has all the income)

What does the Lorenz curve and Gini coefficient look like?

Summarize the likely benefits of more equal distribution of income and wealth

• reduced poverty

• increased AD (lower income households tend to have a higher MPC)

• social cohesion

• human capital investment

Summarize the likely costs of more equal distribution of income and wealth

• reduced incentives

• capital flight

• administrative costs

• market distortions (price ceilings, high minimum wages)

What does capital fight mean?

Wealthy individuals and corporations may move their assets or businesses to countries with lower tax burdens, lowering investment

Define progressive taxation

A tax system where the tax rate increases as the payers income increases

How could government modify markets so they operate more equitably?

1. Progressive taxation

2. Transfer payments (providing direct financial support through benefits)

3. Minimum wage laws

4. Public provision of services

5. Regulation (anti-monopoly laws to ensure fair competiton)

What is inheritance tax?

A tax paid by someone who inherits money o proper of a person who has died

What is stamp duty?

A tax imposed by governments on legal documents, typically those involve info the transfer of real estate or assets (when you buy home or land, you often have to pay this tax to the government to legally register the change in ownership)