3.6 Inequality and Resdistribution

• Define absolute poverty

  occurs when a person lives below subsistence, not being able to meet their basic needs
• Define relative poverty

  measuring a persons poverty relative to the average of the country they reside in
• What are the 2 measures of poverty

  • human poverty index
  • lorenz curve and gini coefficient
• What is the difference between HPI-1 and HPI-2

  HPI-1 measures poverty in developing countries, while HPI-2 measures poverty in developed countries
• What 3 factors does the HPI take into account?

  • life expectancy
  • education
  • ability of citizens to meet basic needs
• Draw a graph illustrating the Lorenz curve and the line of perfect equality

  .

  
• How does the Lorenz curve differ from the line of perfect equality

  the line of perfect equality shows a utopian economy, whereas the Lorenz curve shows a realistic relationship of income distribution
• What does the Gini-coefficient show

  gives a numerical value showing the inequality in a country
• Formula for the gini-coefficient

  Gini = A/ (A+B)
• What does a value of 0 indicate in the Gini coefficient

  perfect equality
• How does economic growth differ to economic development

  economic growth refers to an increase in GDP, whereas development refers to an improvement in living standards and life expectancy
• Which country has Africa received the most aid from

  China
• How can FDI help rescue poverty

  creates employment in the area where the businesses are set up, thus providing citizens with more income
• What are microfinance schemes

  involves borrowing small amounts of money to fund new enterprises
• Who are the usual recipients of microloans

  people who don't have a suitable credit score for a loan from the bank
• How would inequality motivate workers

  would encourage them to work harder, become more productive and gain a higher wage rate
• How are monopolies linked to inequality

  monopolies have the market power to exploit consumers by charging high prices, thus increasing profits for big firms but leaving consumers with less income
• How can government intervention help reduce wealth inequality

  by charging inheritance taxes, the upper class keep less of their wealth, thus reducing the inequality gap
• One social cost of inequality

  social unrest
• Describe the difference between wealth and income

  wealth is a stock of assets, whereas income is money received periodically.
• What is the poverty trap

  mechanism which forces people to remain in poverty
• How could taxes become a poverty trap

  If income taxes are too high, workers may be demotivated to work longer hours as they know they'll receive the same income once taxes are deducted
• Describe a progressive tax

  When the tax rate increases as income increases
• How does negative income tax differ from conventional income tax

  Negative income tax is when a worker earns below a certain income level, so instead of paying taxes the government gives them money