What is income?
All payments received by an individual or a household over time (payments to factors of production)
-> Income is a flow variable
What are earnings?
Wages, salaries and profits from self-employment
What is original income?
Earnings + private pensions + investment income (interest, dividends, rent)
What is gross income?
Original income + government cash benefits (state pension, child benefit)
What is disposable income?
Gross income - direct taxes
What is post-tax income?
Disposable income - indirect taxes
What is wealth?
The market value of the total stock of assets owned by an individual or household at a specific point in time
What is income distribution?
How the total income of the economy is shared among its households
What is income inequality?
When income is distributed in an uneven way between households
What is equivalised income?
A measure of household income which takes into account differences in household size and composition
-> total household income divided by its equivalent size
What is the equivalent size?
The sum of the weights given to all members of a household
What is the Gini coefficient and index?
A way of comparing how the distribution of income in a society compares with a similar society in which everyone earns exactly the same amount
Gini coeffficient ranges from 0 to 1 (greater value = more unequal)
Gini index is coefficient multiplied by 100
What is the Lorenz Curve
The Lorenz Curve shows the cumulative share of income held by different sections of the economy
What is the formula for the Gini coefficient?
A/(A+B) where A is the area between the line of equality and the Lorenz Curve and B is the area under the Lorenz Curve
What are the limitations of the Gini coefficient?
- Subject to sample bias and data inaccuracies
- Not very sensitive to changes in the very top or bottom of the income distribution
- It is possible for two different Lorenz curves to generate the same Gini coefficient
- There may be vastly different Gini coefficients for income vs wealth
- Two countries with the same degree of inequality may have very different standards of living
What are ratio measures of inequality?
These compare how much income people at one level of the income distribution have compared to people at another level
What is the Palma Ratio?
The ratio of the income share of the top 10% of the population compared to that of the bottom 40%
-> addresses the Gini coefficient’s over-sensitivity to changes in the middle of the distribution and insensitivity to changes at the top and bottom
What are the causes of income inequality?
- Differences in wages
- Unearned income from wealth
- Reliance on benefits (eg. unemployed, carers, disabled)
- Age
- Gender
What are the causes of wealth inequality?
- Savings
- Property
- Inheritance
- Enterprise
What is absolute poverty (UN definition)?
A condition characterised by severe deprivation of basic human needs, including food, safe drinking water, sanitation facilities, health, shelter, education and information
What is the international poverty line?
$3 a day at 2021 prices
What is relative poverty in the UK?
The percentage of the population living on less than 60% of median income
What are the consequences of inequality?
- Poor housing
- Poor health
- Inequality of opportunity
- Poverty and deprivation
Inequality also means that the economy is missing out on potential consumption and investment spending and missing out on potential workers
What are possible evaluation points for the consequences of inequality?
- The consequences may be less severe if the relatively poorer households still have decent living standards
- Depends on whether the poor have access to safety nets such as benefits, free healthcare and education -> these measures prevent people falling into absolute poverty
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1.1 The Circular Flow Of Income18
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1.2 Aggregate Demand25
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1.3 Aggregate Supply6
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1.4 Short Run Macroeconomic Equilibrium8
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2.1 Economic Growth10
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2.3 Unemployment34
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2.4 Inflation31
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2.5 Balance of Payments17
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3.1 Fiscal Policy35
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3.2 Monetary Policy8
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3.3 Supply Side Policy6
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2.8 The Philips Curve5
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4.1/4.3 International Trade and Comparative Advantage7
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4.4 Trade Policies: Protectionism18
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4.2 Exchange Rates18
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4.3 Globalisation16
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4.4 Economic Integration15
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2.2 Development12
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2.7 Income Distribution25
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5.1 Money and Interest Rates14
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5.2 The Role of the Financial Sector12
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5.3 Financial Regulation17
