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1.7 The distribution of income
and wealth: poverty and
inequality
1.7.1 The distribution of income and
wealth
Difference between income and wealth
Income is a flow of money going into factors of production. E.g. wages and salaries
from jobs, rental income from property, interest from savings, profits flowing to
shareholders.
Wealth is the current value of a stock of assets owned by someone or society as a
whole. E.g. savings in bank accounts, ownership of property, shares/stocks in
businesses, wealth held in pension schemes.
Wealth can generate income, e.g. stocks/shares generate dividends, savings
generate interest, property generates rent.
Both income and wealth are mutually reinforcing - high income buys assets which
generates income which can buy more assets (wealth).
Factors affecting distribution of income and wealth
Age - wealth is accumulated over time, income increases over time and MRP
increases over time
Education - the more qualifications, the greater the earning potential
Ownership of financial assets, property (factors of production) - these generates
income, could be inherited, worsening inequality
Wage differentials - low pay to certain groups increases inequality
Levels of income - the greater one’s income, the greater ability to benefit from
unearned income, the greater their wealth
Earned income - income from employment and self-employment
Unearned income - income from other factors of production
1.7 The distribution of income and wealth: poverty and inequality 1
, Equality and equity
Complete equity - occurs when every person would have the same amount of
income.
So income inequality is a measure of how much peoples’ income differs.
Equity - this occurs when everybody is treated fairly, but differently, according to
their circumstances.
Equity is a normative concept, and thus cannot be measured.
Measuring inequality
Income inequality refers to the unequal distribution of income, as a factor reward,
received by different individuals in an economy.
The extent of income inequality can be illustrated and measured through the use of
the Lorenz curve, which uses a graphical representation of income distribution to
illustrate inequality. It can also be determined through the use of the Gini coefficient,
which is a measure of statistical dispersion intended to represent the income (or
wealth) distribution of a country’s residents.
Using the Lorenz curve, the income earners in an economy are subdivided into
quintiles. In the following diagram, the highest-earning quintiles represent the
population with the greatest income, and vice versa.
The Lorenz curve
shows that the poorest
20% of the population
only receive 5% of total
income whilst the
richest 20% receive
40% of income,
showing inequality.
At perfect equality, the
poorest 20% get 20% of
income and the richest
20% also get 20% of
income.
The further the Lorenz curve is from the line of perfect equality, the greater the
income inequality. This is because the lower the cumulative percentage of income
1.7 The distribution of income and wealth: poverty and inequality 2
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