Inequality

What does ‘income’ measure?

Income is the flow of money received each year. It can include: a salary, renting out a property, interest earned on cash in the bank, benefit payments, dividends from shares etc.

What is income inequality?

when the best paid workers take home more income than the rest of a country’s workers. For example, the average American CEO was paid around 192 times more than the average worker in 2024.

What does cumulative income mean?

Combined income

What does perfect income equality look like on the Lorenz curve?

Everyone is earning the same and so it is a straight, 45° line which starts in the bottom left corner and finishes in the top right corner.

What does income inequality look like on the Lorenz curve?

produces a curve that start off fairly flat (the poorest workers earn a small amount of income) and then gets steeper as the richest workers earn higher amounts of income.

What does a Lorenz curve look like for a country that does not have significant income inequality?

The vertical axis needs to be labelled with Cumulative % of Income and the horizontal axis needs to be labelled with Cumulative % of Population. The line of perfect equality needs to be drawn from bottom left to top right. Since the question states that the country does not have significant inequality the Lorenz curve should be drawn bending close to the line of perfect equality.

Write the definition of: Lorenz Curve

A graph to show income inequality. The further a Lorenz curve is from the 45° line of perfect equality, the more unequal the economy is.

How do you work out the Gini coefficient?

G= A/A+B

What does the value of the Gini Coefficient represent?

The Gini coefficient is always between 0 and 1.

A value of 0 represents perfect income equality.

A value of 1 represents total income inequality

What does it mean if area ‘B’ on a Lorenz graph is larger?

If Area B is larger then the economy will be closer to the line of perfect equality. This means that the distribution of income is more equal. If B is larger then A will be smaller and so the numerator of the Gini coefficient will be a smaller number. This will make the Gini coefficient smaller, which means the economy is more equal.

What is wealth inequality?

Wealth inequality is when wealth is shared unequally between a population.

What are the factors that change inequality?

• minimum wage

• social assortative mating

• social benefits snd taxes

• The “r > g” Hypothesis

• inheritance

What is the impact of a National Minimum Wage on the labour market diagram?

The NMW needs to be above the equilibrium wage or it will have no impact. It causes the quantity supplied to be greater than the quantity demanded, which means there is unemployment.

What impact is a national minimum wage likely to have for the rich business people at the top of many UK companies?

A national minimum wage will increase costs for UK companies. This will decrease the profit made by these companies. A lower profit will mean that the rich managers may see a decrease in their salary.

What is the impact on income inequality if poor workers earn more and rich workers earn less?

If the poor get richer and the rich get poorer then income inequality will improve - the economy will become more equal.

What is the impact of a decrease on the minimum wage?

A decrease in the minimum wage will decrease wage costs for a business. This will increase their profits which may mean that the manager will receive a higher salary. This will then decrease income equality.

What is assortative mating?

when talented, successful and rich people  get married to and have children with other talented, successful, rich people.

What is likely to happen if a talented, successful, rich person has children with another talented, successful, and rich person?

The children are likely to receive an education and lifestyle that sets them up to be even more talented, successful and rich than their parents.

What is the impact of progressive tax on income inequality?

Progressive tax will decrease income inequality as the poor pay a lower percentage of their income in tax

How will paying out social benefits like job-seekers allowance and pensions affect income equality?

Social benefits decrease the gap between the richest and poorest people in society. This increases income equality.

What does an income growth rate of 3.8% mean

The average income has increased by 3.8% a year

What is the likely impact of r, the rate of return, being larger than g, the rate of growth?

If r > g then rich people with assets will get wealthier at a higher rate than workers with no assets. 

What did Thomas Piketty argue about the R> G hypothesis

Thomas Piketty argues that if r, the rate of returns on wealth, is greater than g, the rate of growth, then wealth will grow faster than incomes. This means that wealth inequality will worsen

Between 1950 and 2012, what was the average annual rate of return, r?

Piketty found that wealth received an average rate of return, r, of 5.3% per year. 

Between 1950 and 2012, what was the average annual rate of growth, g?

Piketty found that the growth rate, g, was an average of 3.8% per year. 

Write the definition of: r > g Hypothesis

If r, the rate of return on wealth, is greater than g, the rate of income growth, then wealth will grow faster than incomes.

What does a larger inheritance mean for inequality?

people receive lots of wealth, which can be used to generate even more wealth and more income. This will worsen wealth inequality and income inequality.