3.4 Inequality & Poverty (DP IB Economics: HL): Flashcards
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Define equality.
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Define equality.
Equality describes situations where economic outcomes are similar for different people or different social groups.
Define equity.
Equity refers to the idea of fairness in the distribution of income and is a normative concept.
True or False?
Equity and equality mean the same thing.
False.
Equality means economic outcomes are similar across people, whereas equity is a normative concept about fairness in those outcomes.
Define absolute poverty.
Absolute poverty is a situation where individuals cannot afford to acquire the basic necessities for a healthy and safe existence, such as shelter, water, nutrition, clothing and healthcare.
Households living with less than of the median household income are considered to be in relative poverty.
Households living with less than 50% of the median household income are considered to be in relative poverty.
What does wealth inequality refer to?
Wealth inequality refers to the differences in the amount of assets that households own.
What are the two main measures of income inequality?
The two main measures of income inequality are the Lorenz curve and the Gini coefficient.
Define the Lorenz curve.
The Lorenz curve is a visual representation of the income inequality that exists between households in an economy.
What does the line of equality on a Lorenz curve represent?
The line of equality represents perfect income distribution, where each share of the population receives an equal share of income.
A Gini coefficient value of represents absolute equality, while a value of 1 represents perfect inequality.
A Gini coefficient value of 0 represents absolute equality, while a value of 1 represents perfect inequality.
What does a Gini coefficient closer to zero indicate?
A Gini coefficient closer to zero indicates a more equal (more equitable) distribution of income.
True or False?
Relative poverty is the main form of poverty that occurs in developed countries.
True.
Relative poverty, measured against median household income, is the main form of poverty in developed countries, while absolute poverty is more prevalent in developing ones.
Define the International Poverty Line (IPL).
The International Poverty Line is the absolute minimum level of income a person must receive to meet the basic needs required for human survival, currently $1.90 a day.
Across which three dimensions does the Multi-dimensional Poverty Index (MPI) track deprivation?
The MPI tracks deprivation across health, education and living standards.
How is poverty data most commonly gathered, making it difficult to measure?
Poverty is usually measured through self-reported surveys, which give rise to multiple discrepancies within and between countries.
What is the major cause of poverty, sitting at the intersection of economic growth and human development?
Low wages are the major cause of poverty, typically resulting from unemployment, informal employment, a lack of skills or a primary-sector economy.
In the poverty cycle, how do low wages perpetuate poverty?
Low wages make education and healthcare unaffordable, leading to poor human capital and low productivity, which in turn keeps wages low and continues the cycle.
Populations with a large number of , such as old people and children, for each working household tend to experience higher levels of poverty.
Populations with a large number of dependents, such as old people and children, for each working household tend to experience higher levels of poverty.
Define globalisation.
Globalisation is the economic integration of different countries through increasing freedoms in the cross-border movement of people, goods and services, technology and finance.
How do differences in human capital cause income inequality?
The higher the skill level, the higher the level of income, so a country with a poor education system experiences greater inequality than one with a good education system.
How does discrimination affect income inequality?
Discrimination on the grounds of gender, race or any other characteristic increases income inequality in an economy.
How can a more progressive tax system reduce income inequality?
Decreasing taxes at the lower end and increasing them at the upper end makes the system more progressive, resulting in a more equal distribution of income.
True or False?
Market-based supply-side policies such as privatisation always reduce income inequality.
False.
Supply-side policies such as deregulation, privatisation and trade liberalisation can create opportunities but often increase inequality, for example when privatisation enriches a few asset buyers.
True or False?
Under capitalism, some degree of inequality is inevitable.
True.
Under capitalism, higher-skilled workers earn more and acquire more income-generating assets, so inequality is inevitable.
What are the three main costs of income and wealth inequality?
The three main costs are the impacts on economic growth, living standards and social stability.
Why can high inequality slow economic growth?
High inequality becomes a disincentive to work, so labour is used inefficiently, national output falls and economic growth slows.
Less equal societies tend to be characterised by political , strife and social unrest.
Less equal societies tend to be characterised by political instability, strife and social unrest.
How does inequality affect the living standards of poorer households over time?
As the gap grows the wealthier access better education and healthcare, creating even less opportunity for poorer households and lowering their relative standard of living.
The main source of government revenue is , which can be used to redistribute income and reduce inequality.
The main source of government revenue is taxation, which can be used to redistribute income and reduce inequality.
Define a direct tax.
A direct tax is a tax imposed on income and profits and paid directly to the government by the individual or firm, such as income tax or corporation tax.
Define an indirect tax.
An indirect tax is a tax imposed on spending, such as Value Added Tax (VAT) or excise duties on fuel and cigarettes.
Give three examples of direct taxes.
Examples of direct taxes include income tax, corporation tax and capital gains tax (also national insurance contributions and inheritance tax).
Define a progressive tax.
Under a progressive tax, a larger percentage of income is paid in tax as income rises.
Define a regressive tax.
Under a regressive tax, a smaller percentage of income is paid in tax as income rises.
Define a proportional tax.
Under a proportional tax, the same percentage of income is paid in tax regardless of the income level.
True or False?
All indirect taxes are regressive.
True.
All indirect taxes are regressive because those on lower incomes pay a larger percentage of their income on the same taxed spending.
True or False?
The less a consumer spends, the less indirect tax they pay.
True.
Because indirect taxes are imposed on spending, the less a consumer spends the less indirect tax they pay.
How does a progressive tax system reduce income inequality?
A progressive tax system redistributes income from those with higher incomes to those with lower incomes, often funding free education and healthcare and financial support for poor households.
Define the marginal tax rate.
The marginal tax rate is the amount of additional tax paid for every additional dollar earned as income.
Marginal tax rates as income increases.
Marginal tax rates increase as income increases.
How is the average tax rate calculated?
The average tax rate equals total taxes paid divided by total income, multiplied by 100.
According to the poverty cycle, what makes a policy effective at reducing poverty?
Any policy that helps to break the poverty cycle at any point will help to improve standards of living within a country.
Name three policies used to alleviate poverty.
Policies include promoting economic growth, improving education and providing more generous state benefits (also progressive taxation and a national minimum wage).
Define transfer payments.
Transfer payments are payments usually given to the poorest and most vulnerable people in society, such as unemployment and disability payments, pensions and heating discounts.
Define a universal basic income (UBI).
A universal basic income is a guaranteed minimum income level paid by the government to each individual in society when necessary.
Define a national minimum wage.
A national minimum wage is a legal wage set above the free market rate, below which firms are not allowed to pay any worker.
A national minimum wage is set the free market rate.
A national minimum wage is set above the free market rate.
True or False?
Transfer payments are usually given to the wealthiest members of society.
False.
Transfer payments are usually given to the poorest and most vulnerable people in society, such as those receiving unemployment or disability payments.
True or False?
A universal basic income is paid only to people who are unemployed.
False.
A universal basic income is a guaranteed minimum income paid to each individual in society, not only the unemployed.
How does investing in human capital, such as education, reduce poverty?
As a supply-side policy it increases potential output and shifts the production possibility frontier outwards, raising human capital, productivity and income.
Investing in education is a policy that shifts the production possibility frontier outwards.
Investing in education is a supply-side policy that shifts the production possibility frontier outwards.
How do policies that reduce discrimination lower inequality?
Discrimination causes social exclusion and inequalities of opportunity and income, so reducing it improves productivity and wages and lowers inequality.
How can targeted government spending on goods and services alleviate poverty?
It can be aimed at the greatest needs in society, such as more schools, teachers or hospitals, raising human capital, productivity and income.
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