Wealth, Income and Poverty

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  • Created by: Clodagh
  • Created on: 01-05-14 13:52
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  • Income, Wealth & Poverty
    • Wealth
      • Wealth consists of assets with a marketable value
        • Assets might include houses, cars and pensions
      • Wealth tends to be more unequally distributed than income
        • The cumulative nature of wealth: Those with valuable assets can derive high levels of income
          • The excess of income over expenditure then adds to wealth. Accumulated wealth is passed down generations
        • Pension rights: These are the second biggest type of wealth in the UK after housing
          • Those individuals whose jobs carry generous pension entitlements therefore gain in wealth relative to others
        • Over time asset prices tend to rise faster than incomes
          • Housing has inelastic supply which sees prices rise significantly when the income elastic demand for housing increases
        • Wealth is less easy to redistribute than income
          • Although wealth can be taxed, it is often used for things such as benefit payments (which affect the distribution of income)
            • It is not unusual to give assets directly to the poorer members of society
    • Income
      • Income is a flow concept measured over a period of time
        • The flow of income is derived from the stock of assets that form wealth
      • Distribution of Income
        • Factors Affecting
          • Wage differentials: Those with high level qualifications and skills tend to generate high marginal revenue product (MRP) for their employers
            • The increasing skill demands of the modern economy are putting a premium on the wages of skilled workers
          • Differences in income earned from assets: The most important are financial assets such as savings and stock market investments, which yield interest and dividends to those who own them
          • Age: The distribution of income is skewed by age. The earnings potential of workers tends to peak in their 40s and 50s when they are rewarded for their work experience
          • The influence of government policy: They tend to operate a progressive system of taxation (which takes a higher proportion of income from those who earn more) and redistribute income through the benefit system
            • Means-tested benefits (available only to those on low incomes and with few assets) have the greatest effect on distribution of income
    • The Lorenz Curve
      • It is a geographical representation of inequality
      • The curve plots the percentage of a nation's income that is enjoyed by the poorest percent of the population
        • The diagonal curve represents complete equality
    • Poverty
      • Absolute poverty affects those who are so poor that their basic needs (food, water, clothing, shelter) are not met and whose continued survival is threatened
      • Relative poverty affects those who are poor relative to others in their society
      • Causes of poverty
        • Low wages: affecting those with few skills and qualifications and hence a low MRP
        • Unemployment: Those affected are likely to be well below the median income level in society
          • Benefit payments may stave off absolute poverty
        • Changing patterns of demand for labour: e.g The decline of UK manufacturing has left those with specific non-transferable skills structurally unemployed
        • Single parenthood: The household has only one potential wage earner, who may be unable to work in the absence of affordable childcare
        • Longer life spans: As life expectancy increases, it is necessary to finance more years of retirement from the pension funds built up
      • The Poverty Trap
        • This refers to a disincentive to work
        • It is created by the interaction of means tested benefits and progressive taxation
        • It is a possible example of government failure occurring from a conflict of objectives between equity and efficiency
      • Evaluation of measures to tackle poverty
        • Withdrawing benefits altogether is undesirable because of the adverse impact it will have on the distribution of income
        • Switching to universal benefits. This is expensive and does not target those who need it most
        • Withdrawing means-tested benefits only gradually as additional income is earned
          • This policy is more affordable and should provide a good incentive to work to those who are on low incomes

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