2.7 Income distribution & welfare

• Income is the flow of money over a period of time. Wages account for the largest proportion. It can also be derived from wealth. e.g. interest from savings.
• Wealth is a stock of assets measured at a date in time. Most peoples source of wealth is their house.
• Geographical distribution of income is how income is shared out between different regions.
• Size distribution of income is how income is shared out between households.
• Lorenz curve is a curve illustrating the degree of equality of income distribution in and between countries.
• Gini coefficient is an index that measures the ratio of the area between the Lorenz curve and the line of absolute equality to the total area under the line of equality.
• A more even distribution of income:

  1. Promotes sustained economic growth, whereas a more uneven distribution could hinder economic growth

  2. Results in a more efficient allocation of scarce resources and the economy is more likely to operate on the PPC and at full employment

  3. Reduces government welfare payments and uses scarce resources more effectively

  4. Promotes social cohesion and reduces market failure.
• Absolute poverty is a situation in which individuals have insufficient income to purchase the basic necessities for survival e.g. food, safe drinking water, sanitation, health, shelter, education and information.
• Relative poverty is defined as household income below the 60% of median adjusted household disposable income before housing costs. The individual has insufficient income to participate in normal social life in the country.
• The poverty trap affects people on low incomes as it creates a disincentive to look for work or to work longer hours because of the effects of the tax and benefits system.
• Income inequality is the unequal distribution of income.
• Causes of poverty & income inequality:

  1. Higher unemployment rates

  2. Proportion of population claiming benefits

  3. Labour productivity rates, skills & quality of the labour force

  4. Occupational structure & occupational mobility

  5. Living costs

  6. Deindustrialisation
• Consequences of poverty & income inequality:

  1. Underutilised resources leading to a lower trend rate of growth & also lower actual growth, leading to less private sector investment.

  2. Reduction in social cohesion

  3. Governments & firms have less resistance to exploitative policies

  4. A large income gap can disincentives people to increase productivity & earnings

  5. The desire to improve can be diminished, reducing entrepreneurship
• The consequences of the poverty trap depend upon:

  1. Whether it is relative or absolute poverty.

  2. The extent of the poverty trap.

  3. The policies that are being used to reduce poverty.

  4. How well the government manages resources & intervenes to improve the economic welfare of its citizens.