Income and equality
Policies that try to change the amount of income people receive instead
Economic growth and national minimum wage
Vertical equity
people with different circumstances are treated fairly but differently
Horizontal equity
people with the same circumstances are treated fairly (i.e. they're treated the same)
What does the Lorenz curve plot?
the % of a nation's income or wealth enjoyed by 'x'% of the population, for values of 'x' between 0-100%
Issues with economic growth
- Hard to achieve - Can also result in larger inequalities in income - e.g. economic growth might mainly benefit the rich so that they become even richer. It can also cause problems such as the using up of finite resources, which might meant POVERTY and INEQUALITY in the future
Examples of measures that reflect quality of life include:
- The Measure of Economic Welfare (MEW) - The Index of Sustainable Economic Welfare (ISEW) - The Genuine Progress Indicator
Differences in income between individuals may occur due to differences in:
- age - location - occupation chosen - nature of work - workings of a progressive tax and benefit system
What will determine patterns of growth and development for a country?
- factor endowment - political system
Differences in wealth may occur to differences in:
- inheritance: often the greatest contributor to an individual's wealth - income: their level of income determines an individual's ability to accumulate more wealth; the poorest have no wealth and no opportunity to accumulate any
Criticisms of alternative measures such as the ISEW include:
- not all environmental effects are included - there is disagreement over what factors should be included in composite indicators such as the ISEW - it is difficult to place monetary values on items such as environmental impact - a weighting has to be given to each factor included - such weightings cannot be made objectively so are made based on value judgements
Negatives for unequal distribution of income and wealth
1. Absolute and relative poverty can remain HIGH 2. It RESTRICTS economic growth and wastes people's talent, because the poorest people won't have the funds to start a business 3. As incomes rise even higher, people generally SPEND MORE on IMPORTS, so this money would leave the circular flow 4. Crime is likely to INCREASE because people don't have what they need
Government policies that are used to redistribute income and wealth AFTER it's been earned
1. benefits 2. state provision 3. progressive taxation
Positives for an unequal distribution of income and wealth:
1. inequality provides INCENTIVES for people to work harder and earn more - so REWARDING hard work INCREASES PRODUCTIVITY 2. it encourages ENTERPRISE by those who have the funds available to start businesses 3. encourages people to WORK instead of claiming benefits 4. TRICKLE-DOWN EFFECT
How can state benefits contribute to the poverty trap?
1. remove means-tested benefits completely - increases incentive to work. However, at least in the SR, it would cause LARGER differences in income, and relative and absolute poverty would increase 2. change means-tested benefits to universal benefits - but the cost of these extra benefits might mean that those on low incomes are taxed more 3. reduce means-tested benefits more gradually as income increases
Causes of poverty
1. unemployment - even in a country where the state gives unemployment benefits, the unemployed are likely to be at the BOTTOM level of income in that country 2. low wages - few skills/ qualifications
Equity
Fairness - people have different circumstances, so it's more about people getting what they need - negative: subjective and based on opinion
What is the main indicator used for most economic policy making?
GDP/ GNI - however it is not able to measure economic progress and quality of life
What are the two types of equity?
Horizontal equity Vertical equity
Benefits to redistribute income and wealth
Tax revenue (mostly from higher incomes) is used to pay for benefits of those who need them
What is the Gini coefficient?
a numerical measure of the inequality shown in a Lorenz curve, allowing inequality comparisons to be made between countries over time - Area UNDER the diagonal line but ABOVE the lorenz curve as a ratio of the total area under the diagonal line
Poverty trap
a situation in which an increase in someone's income is offset by a consequent loss of state benefits, leaving them no better off.
Absolute poverty
a situation where a household's income level is so low that their continued survival is threatened - this applies primarily to people in developing countries, but there are homeless people in rich countries who fall into the category too
Relative poverty
a situation where those in a household are poor in comparison with others in society - relative poverty increases as the distribution in society becomes more uneven
Inequitable income distribution
an unfair distribution of income - what counts as fair/ inequitable is based on value judgement - inequity implies that there is market failure
Why do state-provided services redistribute income?
because most of the money to pay for them comes from taxing people with higher incomes. However, free access reduces the incentive to work and is expensive to provide
Index of Sustainable Economic Welfare (ISEW)
designed to build on the MEW by making further adjustments to GDP data in an attempt to measure the underlying economic, social and environmental factors that reflect how the 'quality' of our lives change over time
Equality
everyone is treated completely equally - they get exactly all the same things - positive: objective and deals with facts
The Gen
further refine the ISEW - comparisons of GDP per capita increases in the US have been made with GPI per capita since 1950, showing relatively poor growth in the latter compared to the former
How can progressive taxation contribute to the poverty trap?
if high income earners are taxed too much, they may move to a country where they're taxed less = this will mean a loss of labour and money from the economy
The Measure of Economic Welfare (MEW)
index was an attempt to recalculate the US's national income accounts - to do this, they took quantitative GDP figures but made allowances for: pollution costs; regrettable necessities; unpaid work and leisure time - intention to improve the welfare value of the data
How will National Minimum Wage (if set at the right level) reduce poverty amongst the lowest paid workers?
it will provide an incentive to work, and will help those on low incomes to afford a reasonable standard of living - an NMW can also counteract monopsony power
Ways in which economic growth will reduce poverty
jobs are created and unemployment will be reduced - tends to lead to higher wages, meaning the gov. will gain more tax revenue, which it can use to provide services
Progressive taxation
means a bigger % of tax is taken from workers with high incomes than those with low incomes = helps to reduce the difference between people's disposable incomes, reducing relative poverty
What does 45 degree line in the Lorenz curve show?
perfect equality - i.e. the poorest 10% have 10% of the income, the poorest 30% have 30% of the income etc
Social exclusion
refers to the idea that the existence of poverty denies opportunities to those that it affects - this leads to problems such as poor educational achievement, poor health and high crime rates, leading to a vicious circle of continued poverty and social exclusion
Why might NMW see a rise in the employment of fewer people?
rise in unemployment = rise in poverty - NMW doesn't take into account of the cost of living standards
Trickle down effect
some economists argue that if there's inequality and greater economic growth, the rich will become even richer and spend more on g/s, providing more income for the poor = relative poverty may increase but absolute poverty will decrease
What does the Lorenz curve represent?
the distribution of income or wealth in a country
Income
the flow of wages and other income in a period of time
The further the Lorenz curve is from the 45 degree line...
the less equally distributed income or wealth is between the members of the population
The closer the Gini coefficient is to 0...
the more equal the distribution of income or wealth
Wealth
the stock of accumulated assets (such as savings, shares and property)
The impact of a progressive tax and benefits system is...
to reduce inequality - the Lorenz curve moves closer to the 45 degree line