Economics Unit 3- Ch9 flashcards

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Define Wealth
the stock of assets (houses, cars) with a marketable value
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Define Income
the flow of earning measured over a given period
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How can wealth be held? (5 ways)
Savings held in bank deposits, ownership of shares, ownership of property, corporate bonds, private pension schemes
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What does the lorenz curve show?
A representation of inequality by plotting the % of a nation's income that is enjoyed by the poorest 'x' % of population
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a) What does a diagonal line show? b) The further away from the diagonal...
a) Complete equality. b) ...the more unequal
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What is the Gini coefficient?
A numerical representation of inequality, derived from the Lorenz curve
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Gini coefficient = (give equation)
(area between line of perfect equality and lorenz curve / total area below line of perfect equality)
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The lower the gini coefficient, the ....
... more equal
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What can gini coefficients and lorenz curves be applied to?
The distribution of wealth as well as the distribution of income
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Give 3 causes of income inequality
1)Wage differentials- high levels of qualifications/people in inelastic supply generate high MRP 2) Differences in income earned from assets - e.g. savings/stocks, which earn interest + dividends. 3) age- earning potential peaks at 40/50 (experience)
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Give 6 causes of wealth inequality (which is more unequally distributed than income)- should be able to explain atleast 4 of them
1) inherited wealth 2) marriage 3) asset prices increase faster than incomes 4) Chance 5) income inequality affecting savings 6) less easy to distribute than income
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List 4 policies to tackle equality (should be able to explain each)
Taxation, monetary benefits, direct provision of goods and services, legislation and labour market policy
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Recent data on distribution of household income...
...Has become more unequal in recent decades due to: large-scale privatisation (rise in executive pay), reduction in top rates of income tax, real value of welfare benefits falling, % of single parent families has more than doubled 1975-2000
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Define absolute poverty
affects those who are so poor that their basic needs (food, water, clothes etc.) are not met and whose continued survival is threatened. (threshold of $1.25 a day at 2005 ppp used as measure by world bank)
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Define relative poverty
affects those who are poor relative to others in their society. It is typically measured relative to median income, using a threshold of 50-60%
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Issues with using relative poverty?
If national income falls, then less people will be in relative poverty even though they are worse off
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List 7 causes of poverty (should be able to explain each)
Low wages, unemployment (and unemployment trap), illness/disability, imperfect information, single parenthood, longer life spans, poverty trap
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What is the poverty trap?
When an increase in income sees the loss of benefits or more tax paid (prevents people going for a promotion)
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What is the unemployment trap?
gains from employment are too small to get a job, so people are trapped in unemployment (prevents people from searching for a job)
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The poverty trap means those on low incomes may face effective marginal tax rates of what? Explain.
...greater than 100%. Earning an additional £1 results in a combined payment of taxes and loss of benefits that is more than £1
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Why can the poverty trap be seen as a government failure?
Could be seen as a conflict of objectives between equity and efficiency (cutting benefits increases efficiency as more people search for jobs, but can cause further poverty/fall in living standards of lowest earners)
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Government policies to tackle poverty (8) (should be able to explain + evaluate each)
National minimum wage, cutting bottom rates of income tax, tackling unemployment, training and education, exploiting 'trickle down' effects, increasing benefits, tax credits, withdrawing means-tested benefits more gradually
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What are means-tested benefits?
benefits which are distributed on the basis of income. Those below a certain income are eligible for them. An example would be direct provision of school meals for those below a certain income
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What are universal beneftis?
universal welfare benefits are given to anyone who fit certain criteria (e.g. with children, of a certain age, a disability) regardless of income. An example would be Child Benefit or Bus Passes for the elderly
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What are the advantages of means-tested benefits? (2)
1)They allow money to be targeted to those who need it most e.g. family tax credit or pension credit. 2)cheaper than universal benefits and reduces burden on tax payer
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What are the disadvantages of means-tested benefits? (3)
Branded as being poor, may create disincentives (poverty trap), difficult to decide a cut-off point (some relatively poor may fall just outside limit),
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What are the advantages of universal benefits?
People feel if they contribute towards taxes, they deserve their benefits regardless of income. No disincentive effects, and no one branded as poor
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What are the disadvantages of universal benefits?
very expensive, therefore benefits become a large burden on the taxpayer
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What is economic equality?
refers to an economy in that all of the inhabitants are equally wealthy, and have the same status in the economy
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What is economic equity?
Refers to a fair distribution of welfare across society
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What is horizontal equity?
Concerned with the fair treatment of people whose circumstances are the same e.g. people with similar ability to pay taxes should pay the same amount
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What is vertical equity?
The fair treatment of people whose circumstances differ. e.g. people with a greater ability to pay taxes should pay more
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Card 2

Front

Define Income

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the flow of earning measured over a given period

Card 3

Front

How can wealth be held? (5 ways)

Back

Preview of the front of card 3

Card 4

Front

What does the lorenz curve show?

Back

Preview of the front of card 4

Card 5

Front

a) What does a diagonal line show? b) The further away from the diagonal...

Back

Preview of the front of card 5
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