Income distribution and wealth

What is income

• It is the flow of money a period of time

• Income can be derived from wealth

What is wealth

• It is a stock- the amount of money at a hiven point in time

• E.g. Value of assests- property

What is marketable wealth

It can be transferred to another person e.g pensions, houses

What is non-marketable wealth

Wealth that can't be transferred to another person e.g. pension rights

What is geographical distribution

How income is shared between different reigons

What is size distribution

How income is shared between households

What is income inequality

• It refers to the disparities in distribution of economic assests and income

• Refers to ineqaulity among individuals and groups in society

Policy objectives for more even income distribution

• Promotes sustained economic growth, whereas a more uneven distribution could hinder economic growth

• Results in more efficient allocation of scare resources and economy more likely to operate on the ppc and at full employment

• Reduces government welfare payments and use scare resources more effectivly

• Promotes social cohesion and reduces market failure

What is absolute poverty

• It is a condition characterised by severe depreviation of basic human needs e.g. food, safe drinking water, health, shelter

• Not only access to income but also social services

What is relative poverty

• It is when household income is less than 60% of median income before housing cost

• The median income is that earned by households in the middle of income distribution

What is the poverty trap

• It affects people on low income

• It crwates a discentive to work or work longers hours because of the effect of tax and benefit system

What is the lorenz curve

• It is an effective way of showing income inequality between countires because they illustarte income and wealth distribution

• The cumulative percentage of population x-axis cumulative perxentage of income y-axis

• The curve shows the relationship between percenatge of income recipients and percenatge of income they did receive

• The 45 degree line shows where there is even distribution

• The closer the curve is to the line of equality more distribution of income

• The more the curve bends away less even distribution of income

The Gini coefficient

• It is the ratio of area between the curve and line of equality to the total area under the line

• The greater area between line and curve the grater income inequality and greater gini coefficient

• Ranges from 0-1

• Ratio 0- total equality

• Ration 1- total inequality

What are the causes of poverty and income inequality- unemployment rates

• High rates of unemployment will result in rising rates of relative poverty

• Structural unemployment and long term unemployment causing the hysteresis effect will widen income inequality and could result in regional disparities if industries are concentrated in particular areas of a country

Causes of poverty and income inequality- proportion of population claiming benefits

A greater number of people claiming income support indicates a loss in household incomes and increases the risk that there will be a rise in poverty levels

Causes of poverty and income inequality- Labour productivity rates

• Labour productivity rates and the skills of the labour force influence the employability of people and the length of frictional unemployment

• The more productive the labour force or the more flexible the labour market the more likely income inequality and poverty are to be produced

Causes of poverty and income inequality- Industrial structure

• When a country experiences deindustrialisation there will be a change in the pattern of economic activity

• This can result in a negative regional multiplier and higher structural unemployment leading to regional inequality

Causes of poverty and income inequality- Occupational structure and occupational mobility

The less mobile labour is the less likely people are to move from one job or industry to another

Causes of poverty and income inequality- Living costs

• The higher the living costs the lower the purchasing power of household income s

• Those who are lower income earners will experience the regressive effects of rising living cots which will further increase income inequality

Consequences of poverty and inequality

• Poverty and income inequality can result in underutilised resources and therefore a lower trend rate of growth through people being caught in the poverty trap and therefore lacking the incentive to work harder or at all. The economy is missing out on their skills and labour. Therefore, poverty results in in allocative inefficiency because resources are not being used as growth leading on to the market demand failure side of There the is also economy a efficiently as possible, short run economic lack of result in lower rates of household consumption and therefore, incomes will as lower to the accelerator principle, there will be less incentive for according private sector investment

• There could be a reduction in social cohesion as those in relative poverty are unable to engage fully in society, have limited social mobility and maybe less inclined to support government policies

• In some circumstances, particularly where there is absolute poverty, government and firms have less resistance to exploitative polices.

  Resources could become overexploited, and corruption and resource conflict can occur, which limits economic growth and prosperity.

• The consequences of the poverty trap depend upon whether it is relative or absolute poverty, the extent of the poverty trap, the policies that are being

  used to reduce the number of people in poverty and the efficacy of these policies, and how well the government manages resources and intervenes

  to improve the economic welfare of its citizens.

• When the income gap becomes too great (as measured by the Gini coefficient) this can act as a disincentive to increase productivity rates and the earnings -

• A lack of aspiration can reduce entrepreneurship and innovation.

• The government will need to intervene to redistribute income if it has desire to improve is diminished the objective of a more even distribution of income This would happen through progressive taxation systems and providing support through

  cash benefits (income support/child benefits) and benefits in kind. This use of government funding could have an opportunity cost and result in government borrowing