Economics AT 2 Distribution of Wealth and Income

Circular Flow of Income

Income ---> Expenditure ---> Production ---> Income

Household Income

All current receipts, whether monetary or in kind, that are received by the household or by individual members of the household which are available for or intended to support current consumption

Earned Income

Income received by Australians that represents a reward for direct or physical contribution to the production process

Unearned Income

Income received by Australians that represents a reward for providing resources other than labour, a reward for indirect contribution to the production process

Transfer Income

Any income that is transferred from one group to another, without providing any goods, services or assets in return to the payer.

Private or Market Income

Income received in the market place primarily as a result of individuals making a contribution to the production process, such as supplying labour.

Gross Income

Private income plus direct cash benefits received from the Government

Disposable Income

Gross income less direct taxes levied by the Government

Social Wage Income

Disposable income plus any indirect Government benefits provided in the form of goods and services such as public housing, education, health and welfare

Final Income

Social wage income less production taxes

Equivalised Household Income

Uses disposable income and adjusts it to take into account the size and composition of households.

Nominal Income

The value of income that is received by an entity in actual dollar terms

Real Income

The value of income received after taking into account the effects of inflation

Wealth

The total monetary value of assets that can be used to purchase goods and services in the future.

Net Wealth

The total value of assets minus the total value of liabilities.

Relationship between income and wealth

Australia's economic system is a capitalist wealth creating economic system, wealth is created by income, and can be used to generate further income through returns on savings and investments

Cycle of Income Wealth and Savings:

Income --> Savings --> Wealth --> Income

Lorenz Curve

Plots the percentage share of total income earned on the vertical axis against each quintile on the x axis. It highlights the share of total income earned by each 20% of the population

Gini Coefficient

A number between zero and one providing an indication of the degree of inequality in the distribution of income (closer to zero means more income equality)

Calculated by taking the area between the lorenz curve and the line of Absolute Equality (A) and dividing it by A+B)

Poverty and Inequality

Poverty is closely linked to inequality given that it is the lowest income earning households who are likely to be living in poverty

Absolute Poverty

Refers to people living in a situation where they have insufficient income to purchase basic, necessary goods and services

Relative Poverty

Occurs when a household has a low level of income compared to a generally agreed standard (the Henderson Line in Australia)

Henderson Line

Measures poverty in Australia, is the benchmark level of disposable income for various household sizes. Households belows the Henderson line are considered to be in relative poverty

Indicators of Inequality and Poverty

- GINI coefficient

- Henderson Line

-GNI per capita

- HDI (Human development index)

Reasons for wealth, income and poverty inequality in Australia

-Different levels of renumeration levels within the workforce (due to differences in skills, talents or abilities) quality of human capital differences. Highest level of renumeration received by individuals supply labour to markets where the supply of labour is low compared to demand

-Unequal ownership of factors of production - higher net worth creates more income, contributes to further inequality

- Unemployment

-Unregulated Markets -if the market operates without Government intervention through regulations, it can contribute to higher levels of inequalities, as while they may bring more equity by creating. more jobs and reducing absolute poverty, it may reduce equity by widening the gap between high and low income earners

-Inheritance - transfer income that can be used to generate wealth through assets, leading to further inequality due to unequal ownership of factors of production

-First nations and gender issues

Unemployment

Unemployment: The number of people who are actively seeking a job but are not paid in employment or work more than 1 hour a week.

Underemployment: Where individuals are reluctantly working less than full time hours or at a level below their skill set, and wish to work more hours or at a higher level

Frictional Unemployment: When individuals become unemployed for a short period of time as they move from one job to another

Cyclical Unemployment: When individuals become unemployed due to seasonal economic downturn causing a fall in the demand for labour.

Longterm Unemployment: When an individual is without a job but looking for work for more than 12 months

Structural Unemployment: Where unemployment has arisen due to changes in the structure of the industry, that results in workers no longer possessing the skills or human capital needed in the industry

Hardcore Unemployment: Individuals who are unemployed for a prolonged period of time due to a lack of skills or physical or mental characteristics, or lack of motivation preventing them from gaining employment

Hidden Unemployment: Individuals who have been long term or hardcore unemployed have eventually stopped looking for work, so are no longer counted in unemployment statistics

Economic Responses to Poverty and Income and Wealth Inequality

-Budgetary Policy Initiatives - refers to changes in the spending and or taxation decisions of the federal government, the main tool used by the Government to achieve equitable distribution of income

Government may look to reduce inequality by:

1. Targeting Unemployment (spending on training and education to improve productive efficiency and quality, increasing demand for labour

2. Provision of Cash benefits - welfare, Jobseeker, to enable those in poverty to purchase goods and services (transfer payments)

3. Implementation of Progressive Tax System - where higher income earners pay a higher percentage rate of tax compared to lower income earners, meaning the majority of the tax burden falls on those with the capacity to pay

4. Proportional Taxes - where the tax rate stays the same regardless of how much income, meaning everyone pays the same proportion of their income in tax

5. Provision of non cash benefits to lower income households (housing, free education)

6. Exempting basic goods fro GST - GST is regressive in nature, meaning lower income earners pay a higher proportion of their income in GST than high income earners.

Universal Basic Income (UBI)

A system whereby all citizens in a country receive a fixed amount of income each month, paid regardless if they are employed, unemployed or not in the labour force, and is sufficient to have a basic standard of living in society. Increasingly popular as there is a rise in job insecurity.

Foreign Aid

The provision of financial assistance in the form of money, goods and services or expertise to support those who need assistance through no fault of their own. Overseas Development Assistance