4.1.7 – Distribution of Income and Wealth: Poverty and Inequality

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    4.1.7.1 – Distribution of income and Wealth
    Consumption by Individual Depends on Wealth and Income
    1. Income is the flow of money a person or household receives in a time period
    • Income comes from many sources – e.g. wages, interest on bank
    accounts, dividends from shares, property rent
    2. Wealth is the stock of everything that has value that a person or household
    owns at a point in time– assets, land, money and shares
    • The two variables are highly linked as:
    o those on high incomes save more so become wealthier
    o those on low incomes borrow more so become poorer

    Equality v Equity
    • Equity is when people are treated fairly, but differently, taking into account the circumstances
    o Equity is a normative statement (value judgement) as different people have different views on what is fair
    • Complete equality in the distribution of income is achieved when everyone gets the same wage
    • Degree of inequality is the extent to which incomes differ
    o Equality is a positive statement which can be measured through
    distributions in income and wealth

     

    Lorenz Curve and Gini Co efficient
    • This is a measure for inequality
    • Gini co efficient measures area
    under the Lorenz curve
    o A lower Gini co-efficient
    the more equally income
    is distributed

     

    Costs and Benefits of Governments Trying to Distribute Income and Wealth More Equally
    • Government intervention corrects market failure
    o Level of redistribution undertaken is a value judgement
    o Excess Redistribution of income through progressive tax
    ▪ reduces incentives for low paid workers on high benefits and firms to work hard
    ▪ reduces incentive for efficiency and could cause greater market failure.

    4.1.7.2 – Problem of Poverty

    Poverty is caused by low real national income relative to a
    country’s population and by inequalities in redistribution of
    income and wealth
    o Absolute Poverty – condition characterized by severe deprivation of basic human needs (food, water
    shelter, education, health
    o Relative Poverty – occurs when income is below a specified proportion of average income e.g. below
    60% of median income
    Causes of Poverty:
    • Old Age and Poverty – many rely on state pension rather than private pension
    • Unemployment and Poverty – Unemployment Benefits are lower than the pay workers get when working
    • Low wages and Poverty – low wage / unskilled workers have relative poverty if job is lossed
    Effects of Poverty:
    • Education deprivation from a young age
    • Health Deprivation – more likely to die from illness
    4.1.7.3 – Policies to Help Poverty and Aid Distribution of Income and Wealth

    Poverty and the Tax and Benefits System
    • Making Labour Markets More Progressive and increasing
    benefits reduces poverty in the short run, but it lowers
    labour markets incentives, competitiveness and growth
    o So, this policy in the long run raises poverty (gov failure)
    • Taxes have reduced the income inequality from a 15 times gap to a 4
    times gap.
    • The chart on the right shows the stages taxes and benefits affect
    distribution of income

    Fiscal Drag, Poverty and Low Pay
    • This is where the tax thresholds (£10000) aren’t changed in line with
    inflation
    1. So, a worker receiving £9999 would get no tax
    2. A wage rise due to inflation could increase wages to £10100 but they are
    now getting taxed for the £100 so the individual is worse off
    The Poverty Trap
    • Fiscal policy is a cause of the poverty trap
    • So, as you go above tax free threshold you lose your right to claim
    benefits as your above the means tested benefits threshold
    The Unemployment Trap
    • People who believe they are better off out of work living on benefits
    o Rather than paying tax, National Insurance and losing their means tested benefits
    o They could work in the black economy and still claim their full benefits
    Consequences of Government Policies which affect Poverty and Distribution of wealth and income
    • Less incentive to work hard through higher taxes so less entrepreneurship – slowing the country’s growth
    • Raising benefits can lead to the unemployment trap lowering country’s full potential capacity

     

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