Measuring Income & Wealth Inequality (Cambridge International A-Level Economics)
Income as a flow concept
Income
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Income is the flow of earnings received over a period of time from the factors of production
- Rent, wages, interest and profit
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Income inequality refers to differences in the distribution of income between individuals or households
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High inequality may lead to:
- Poverty
- Social instability
- Lower economic growth
Wealth as a stock concept
Wealth
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Wealth is the stock of assets owned at a point in time
- E.g. Property, shares, antiques, pension schemes
- Assets can be used to generate a flow of income
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Wealth inequality refers to differences in the distribution of assets between individuals or households
- Wealth can generate income, which can increase inequality over time
The Gini coefficient
- The Lorenz curve can be used to calculate the Gini Coefficient
*The Gini Coefficient is calculated using the area beneath the line of equality *
Diagram analysis
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Gini coefficient = A / (A + B)
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Where:
- A = area between the line of equality and the Lorenz curve
- B = area under the Lorenz curve
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A value of 0 represents absolute equality and 1 represents perfect inequality
- In 2017, Estonia had a lower Gini coefficient (0.3) than South Africa (0.62), indicating a more equal distribution of income
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Governments use progressive taxation and transfer payments to shift the Gini coefficient closer to zero, the line of perfect equality
Worked Example Explain what happened to income inequality in Bolivia between 2008 and 2016
Income Gini Coefficient Data for Bolivia
Income Gini Coefficient 2008 0.51 Income Gini Coefficient 2016 0.43 Step 1: Determine if inequality has improved or worsened
- The closer to zero, the closer the country is to perfect equality
- Bolivia's inequality has improved as the Gini coefficient has fallen
- The closer the Gini coefficient is to zero, the more equal the distribution of income is in a country
Step 2: Provide final comment
- Bolivia's Gini coefficient has moved closer to zero, indicating that there is less income inequality in 2016 than there was in 2008
Economic reasons for inequality
Causes of income and wealth Inequality
- There are many causes of income and wealth inequality
| Education, training and Skills | Trade unions | Welfare system | Pension payments |
|---|---|---|---|
| - The higher the skill level the higher the level of income. - A country with a poor education system will see greater inequality than one with a good education system | - Countries with strong trade union membership tend to have higher levels of income. - With low trade union membership, the exploitation of workers through low wages is easier | - Countries that provide a range of benefits (such as unemployment, disability, child support, housing support etc) **raise the income of the lowest 20% of the population resulting in more equal distribution | - State pension payments ensure a minimum standard of living for retirees resulting in a more equal distribution of income. - Countries without it have a much higher percentage of pensioners living in poverty |
| Wage rates | Employment legislation | Tax structure | Asset ownership |
| - The purpose of a national minimum wage is to improve the equity in the distribution of income. - Without a minimum wage → lower incomes for low-skilled workers → greater income inequality | - Generally, the more workers are protected by law, the better the income distribution in an economy e.g. maternity benefits ensure that new mothers have a higher level of income during the first months of leave after a birth | - Progressive tax systems allow all income earners to contribute to public revenue according to their ability. - Decreasing taxes on the lower end and increasing it on the upper end would mean that the system is more progressive and there would be a more equal distribution of income | - Assets generate income**. - The more equal the asset ownership in an economy the less the inequality in income distribution - Wealth passed across generations → increases wealth inequality |
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