7.3

• What is the national minimum wage?


  The lowest wage that employers can legally pay their employees
• protectionism definition

  government polices that restrict international trade in order to protect domestic industries e.g import tariffs
• what is economic growth?

  an increase in national output as measured by real GDP
• what is economic development?

  the sustainable increase in living standards for a country, typically characterised by increases in life span, education levels and income
• when do negative externalities occur?

  when an economic transaction creates harmful effects (external or spillover costs) on third parties
• what are the supply-side policies?

  these aim to improve quantity/quality of the factors of production thereby raising potential output
• what is regressive tax?

  a tax that takes a higher percentage of income from households on low income
• What is fiscal drag?

  When tax thresholds don’t rise with inflation, causing individuals to pay more tax as their income rises.
• fiscal drag reduces disposable income, worsening poverty and inequality
• how can progressive taxation reduce poverty?

  it redistributes income by taxing the rich more and the poor less
• how do taxes and benefits reduce inequality?

  taxes reduce high incomes, and benefits raise low incomes, narrowing the gap
• before taxes and benefits, how much larger was the richest fifth’s income to the poorest in 2019/20?

  12 times larger ( £131,670 vs £10,958) - according to Office of National Statistics
• is universal credit a universal benefit or a means-tested benefit?

  Means-tested
• what is universal credit?

  Welfare benefit
• how does fiscal drag worsen poverty?

  it reduces real income by increasing tax payments without raising living standards
• what is the poverty trap?

  When earning more leads to higher taxes and reduced benefits, discouraging work. a cycle of poverty where people unable to escape due to factors like lack of education, limited access to resources, and low income.
• Why do low-paid workers get trapped in poverty?

  Higher taxes and lost benefits reduce the reward for working more
• how can the poverty trap be reduced?

  raise tax thresholds and increase the National Living Wage
• how does inflation contribute to fiscal drag?

  inflation raises prices and wages, pushing people into higher tax brackets without an increase in real income, resulting in higher tax payments and less disposable income
• how does the earnings trap affect low-paid workers?

  low-paid workers can lose access to means-tested benefits as their earnings increase, while also paying higher taxes and national insurance. this reduces their disposable income, trapping them in poverty
• What is the purpose of a progressive tax system?

  To reduce income inequality by taxing higher incomes at higher rates
• what is the effect of increasing welfare benefits?

  it boosts the income of low earners, reducing poverty
• what is the trade-off of increasing welfare benefits?

  it may reduce the incentive to work, creating welfare dependency
• how does indirect taxes affect low-income households?

  they’re regressive, taking a larger proportion of income from the poor
• what is “final income”?

  income after taxes, cash benefits, and benefits in kind (e.g education, healthcare)
• why can raising the minimum wage help reduce poverty?

  it increases earnings, reducing reliance on benefits
• what role do education and training play in reducing poverty?

  they improve skills, increasing employability and income
• how can government spending reduce inequality?

  by funding public services like healthcare and education, benefiting low-income groups
• what is the impact of proving free healthcare and education?

  reduces living costs for poorer households, improving equality
• why might cutting taxes on low incomes reduce poverty?

  it increases disposable income and work incentives
• what is the downside of increasing welfare benefits?

  may create a disincentive to work and increase government spending
• why might higher taxes on the rich be controversial

  could discourage investment and economic growth
• how can government intervention lead to government failure?

  poorly designed policies can reduce incentives to work or create inefficiency
• what is the long term solution to reducing poverty?

  investing in education, skills and job creation to increase incomes sustainability
• Any policy that helps to break the poverty cycle at any point will help improve the standards of living within a country
• policies used to alleviate poverty include…

  • promoting economic growth
  • improving education
  • providing generous state benefits
  • progressive taxation
  • establishment/increase of a national minimum wage
• what reduces poverty and inequalities in the distribution of income?

  • making taxation more progressive
  • increasing welfare benefits
• what do pro-free-market economists believe?

  In the drive to reduce inequality, these changes worsen:

  • labour market incentives
  • competitiveness
  • economic growth
• what can worsening labour market incentives, competitiveness and economic growth lead to?

  a culture of dependency with people log-term unemployed and reluctant to look for work
• what will long-term unemployment and reluctance to look for work lead to? (pro-free-market view)

  • low incomes may fail to grow
  • poverty may increase

  meaning government intervention in labour markets results in government failure