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