A* analysis and evaluation for Edexcel a -level economics. Start revising now and save time. This covers theme 4 - 4.2 poverty and inequality. Everything you need to know for this topic
4.2 Poverty and Inequality
Income inequality- when the distribution of income isn’t equal i.e. when a large share of the income is held by a small
proportion of the population
Poverty- when incomes are not high enough to meet basic human needs
Absolute poverty- those people who do not have adequate nutritional intake per day, or don’t have adequate shelter
or clothing in order to survive. World bank reports number of people in countries below a $1.90 a day
Relative poverty- the relative position of one economic unit compared to another economic unit. A person can be
relatively poor but not absolutely poor- distribution of income in a country
Lorenz curve- degree of income inequality in a given economy or population. Further away Lorenz curve is from line of
absolute equality- greater degree of income inequality
Gini coefficient- measures extent to which distribution of income among individuals within an economy deviates from
a perfectly equal distribution. 0-1
Poverty line- minimum level of income deemed necessary to achieve an adequate standard of living in a given
country.
Poverty trap- a situation in which there’s little incentive for workers in low paid jobs to earn extra income- result in
having to either pay higher taxes or losing welfare benefit
Economically inactive- those who are of working age but not seeking work for whatever reason
Earnings- made up of wage plus overtime pay, bonuses and commission
Wealth- stock concept value of assets owned by a household, property, shares, saving
Wealth inequality- the degree to which wealth is distributed unequally across a population
Capitalism- economic and political system in which a country’s trades and industry are controlled by private owners
for a profit
Dependency ration- ratio of dependents to the working population
Gini coefficient- A/(A+B)- the ratio of the area between the 45-degree line and the Lorenz curve divided by the
whole triangle under the 45-degree curve. It is measured between 1 and 0 and the bigger the coefficient, the more
unequal the country.
Lorenz curve- shows the cumulative percentage of the population plotted against the cumulative percentage of
income that those people have. A perfectly equal society would have a straight line from corner to corner; the
degree of the bend away from that straight line indicates the degree of inequality
Wage differentials- the difference in wages between workers. Differences in wages between differently skilled
workers in same industry, or similar skilled workers in diff industries.
Minimum wage- wage set above the equilibrium
Maximum wage- wage set below the equilibrium price
,Absolute poverty:
§ People are unable to afford sufficient necessities to maintain life. ‘Condition characterised by sever deprivation of
basic human needs, food, safe drinking water, sanitation, health, shelter
§ World Bank defines anyone living on less than US$1.90 a day= absolute poverty.
Economic development tends to be correlated with absolute poverty
1. Global poverty rates= 9.2% (absolute poverty)
2. 1990= 36%
Relative poverty- will always exist in society that’s not completely equal. Comparison of incomes relatively. relative
poverty are those who cannot afford to buy goods which they need to buy in order to not be considered poor
according to social norms,
§ Income is less than 60% of median household income
§ Has increased in the UK in the last generation
§ 14 million people living in relative poverty
Causes of poverty
§ Poor education and healthcare- poor access find it difficult to gain human capital, skills and productivity to
access jobs in economy- trap them in poverty with very low incomes
§ Recession- labour is a derived demand. Economic growth= low- less need for labour increasing u/e. once more
firms suffering from decrease in rev and less profitability- reduce workforce to compensate- lost income,
decrease in sol in either absolute or relative poverty
§ Born into poverty
§ Lack of skills- occupational immobility of labour, low productivity
§ Those on higher salaries see larger income growth than those on lower salaries or changes in gov spending or
tax. Absolute poverty tends to fall as GDP increases, assuming state provides support to those who are unable to
benefit from a growing economy.
§ UK relative poverty has increased: growing inequality in wages growth, with the highest paid jobs seeing their
wages increase higher than those on lower wages. Those in the public sector have had low wage increases and
several years of falling real wages, due to the policy of austerity.
§ De- industrialisation – increased number of service sector jobs – low paid. Export less high value-added goods-
shift lower paid jobs
§ Underemployment – growth, zero hour contracts, temp= lower wages for workers
§ Trade union power - declined in last 30 years= able to bargain for higher wages.
§ State benefits - fallen in relative value whilst taxes have become more regressive
§ Structural employment has risen
Top 1% of income earners- 30% of taxation 40-45 own 80% of assets- wealth inequality
Consequences of poverty:
§ Low standards of living in both material and non- material term
§ Poverty traps- could be cyclical with low incomes depriving individuals of access to healthcare and education,
keeping levels of human capital and skills low- prevents any increase in productivity trapping these individuals in
a life of persistent low income.
§ Low incomes reduces savings- financial intermediaries don’t have funds to issue loans out to businesses for
investment. Low investment- low econ growth ensuring low incomes – persistent poverty
,Causes of income/ wealth inequality:
§ Age- as a person gets older- experience, human capital increases- increasing productivity, incomes. Younger
gen don’t have the same experience/ human capital= lower incomes
§ Education- more educated with school, college and university qualifications = higher incomes. In a capitalist
economy compared to those with little education- given individuals paid according to productivity and how
much rev they bring in for employer
§ One sector dominant and capital intensive production. If economy is highly specialised- output coming from one
dominant sector, workers and capital owners in the specific industry benefit from higher incomes whereas rest
of economy suffer widening income disparities
§ Globalisation and free movement of labour and trade- increase in inequality within developed countries.
Immigration decreases wages of low skilled and low paid- increases pay of those on high salaries, trade
liberalisation- increase in foreign comp—decreases ages of low skilled workers as firms look – reduce COP.
§ Technology- replaces various skills of workers redundant -reducing wages in those industries- pushing them into
low paid, low skilled work but created niche sector requiring technical experience- high wages. Tech – sub
increased profit potential of industries without needing employees, increasing incomes drastically in such
professions widening income disparities (banking)
§ Ownership of financial assets and property- own financial assets = greater wealth than those who don’t have
enough income to purchase such financial assets.
§ Corrupt governance- worsen income inequality by not re-distributing tax rev to help poor- transfer payments or
spending on healthcare/ education- instead pocketing money themselves in hidden bank acc. May divert tax
money to elite given voting powers of capital owners and large funding received for electoral campaigns
Consequences of income inequality:
§ High levels of debt - more income inequality - more individuals on lower end of income spectrum- will need to
borrow to finance expenditures e.g, house, car. This is because free market does account for needs thus
excluding poor from consumption – cannot afford market price. Excessive debt and risk taking by banks- create
instability in financial system- increase chances of financial crisis and deep recession if loans cant be paid back.
ash
§ Costs to the GOVT. Policies to deal with income inequality are very costly for gov = deal with social costs it
causes- carries huge OC. If money had to be borrowed = taxes in future would have to rise. Indirect taxes, VAT,
fuel duty go up to fund spending = regressive impacts hurt the poor contradicting intentions of policies. Cutting
spending in other areas of economy e.g., education -negative impacts suffered by poor relying on these
j
§ Social costs. Poverty brings many social issues e.g., higher crime rates, vandalism, rioting, mental health –
greater pressure on Gov finances = negative externalities but also social breakdown of society - Greece for
example
§ Lower economic growth- lower incomes= lower levels of education and health= reducing productivity= reducing
potential econ growth- growth rates lower than what they could be
Those on lower incomes= higher MPC than rich= high MPS and thus more income inequality - greater share of
income is held by a small proportion of wealthy population- wont translate into high levels of consumer spending
as if that wealth was more equally distributed to those on lower incomes. Can’t build up stock of assets
Wealth is likely to be more unequally distributed than income because assets that make up wealth can be
accumulated over time. People who are wealthy now can generate an income from those assets- as long as income
exceeds expenditure= build up a stock of assets. This accumulation of wealth can occur over successive generations
through inheritance
, Causes of inequality between countries:
§ Some countries - held back by wars, droughts, famines and earthquakes. Certain social groups may have been
excluded and marginalised. Developed countries tend to favour each other when trading, negotiating etc. and
this helps them to develop more than countries who are not involved in the agreements.
§ 50% of UK goods are imported from EU
Impact of economic change and development:
§ Kuznets hypothesis says that as society develops and moves from agriculture to industry, inequality increases as
the wages of industrial workers rises faster than farmers. Then, wealth is redistributed through taxation and
GOVT spending and so inequality falls.
§ However, Piketty discredited this theory by arguing that inequality rises as the country develops as the rate of
return on capital grows quicker than GDP, so the rich get richer and inequality increases. (between countries)
Significance of capitalism:
§ A capitalist economy leads to income inequality because of wage differentials. Wages vary as they are based on
demand and supply, and demand and supply vary for different jobs.
§ Individuals also own resources and thus wealth differs based on the assets they own. Wealth can be passed on or
gained through saving of incomes.
§ It is argued that equality can never be achieved in a capitalist society - possibility of having more is important to
encourage hard work. Without the incentive to gain more, people will not try hard or take risks since they have
no reason to= economy won’t grow; inequality is essential for capitalism to work. Boost productivity- labour
increases- increase productive potential
§ A degree of inequality is necessary and desirable, but excessive inequality causes problems with efficiency and
social justice. If everyone is in poverty- no incentive to improve situation and take risks
§ Lower taxes- increase investment- start-ups, entrepreneurship
Measuring income inequality:
§ The Lorenz curve- shows the cumulative percentage of the population plotted against the cumulative percentage
of income that those people have. A perfectly equal society would have a straight line from corner to corner; the
degree of the bend away from that straight line indicates the degree of inequality.
§ The Gini coefficient: A/(A+B)- the ratio of the area between the 45-degree line and the Lorenz curve divided by
the whole triangle under the 45-degree curve. It is measured between 1 and 0 and the bigger the coefficient, the
more unequal the country.
§
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