3.4 Inequality & Poverty (DP IB Economics: SL): Flashcards
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Define equity.
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Define equity.
Equity refers to fairness in the distribution of income and is a normative concept.
Define equality.
Equality describes situations where economic outcomes are similar for different people or different social groups.
What does wealth inequality refer to?
Wealth inequality refers to differences in the amount of assets that households own.
True or False?
Equity means that everyone in an economy receives the same income.
False.
That describes income equality; equity refers to fairness in the wage differentials that exist in society and is a normative concept.
Define absolute poverty.
Absolute poverty is a situation where individuals cannot afford the basic necessities for a healthy and safe existence, such as shelter, water and nutrition.
Define relative poverty.
Relative poverty is a situation where household income is a certain percentage (commonly less than 50%) below the median household income in the economy.
How did the World Bank define the international poverty line in 2022?
In 2022 the World Bank defined absolute poverty as living on less than $1.90 a day.
The Lorenz curve plots the cumulative percentage of a nation's total income against the cumulative percentage of the nation's .
The Lorenz curve plots the cumulative percentage of a nation's total income against the cumulative percentage of the nation's population.
What does the Lorenz curve show?
The Lorenz curve is a visual representation of the income inequality that exists between households in an economy.
Define the Gini coefficient.
The Gini coefficient is a numerical measure of income inequality where a value of 0 represents absolute equality and 1 represents perfect inequality.
True or False?
A Gini coefficient closer to 1 indicates a more equal distribution of income.
False.
A Gini coefficient closer to 0 indicates greater equality, while a value closer to 1 indicates greater inequality.
Which three dimensions does the Multidimensional Poverty Index (MPI) measure?
The MPI tracks deprivation across health, education and living standards.
Why is poverty difficult to measure accurately?
Poverty is usually measured through self-reported surveys, which give rise to discrepancies within and between countries.
What is considered the major cause of poverty?
Low wages are the major cause of poverty, representing the intersection of a lack of economic growth and human development.
What factors typically cause low wages?
Low wages usually result from unemployment, informal employment, a lack of skills, or a primary-sector based economy.
Populations with a large number of for each working household tend to experience higher levels of poverty.
Populations with a large number of dependents for each working household tend to experience higher levels of poverty.
True or False?
In the poverty cycle, low productivity leads to higher wages.
False.
Low productivity results in low wages, which reduces access to education and healthcare and perpetuates the cycle of poverty.
How do differences in human capital cause income inequality?
A country with a poor education system experiences greater inequality because a higher skill level commands a higher level of income.
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 can a more progressive tax system reduce income inequality?
Decreasing taxes on lower incomes and increasing them on higher incomes makes the system more progressive, producing a more equal distribution of income.
How does trade union membership affect income inequality?
Strong trade union membership gives workers more power and higher incomes, whereas low membership makes the exploitation of workers through low wages easier and worsens inequality.
Define supply-side policies.
Supply-side policies, such as deregulation, privatisation and trade liberalisation, are measures that can create economic opportunities but may also increase inequality.
Why can privatisation increase income inequality?
Privatisation of state-owned assets often allows a few people to get rich, while the newly privatised service may become more expensive to access.
True or False?
Under capitalism, income inequality can be completely eliminated.
False.
Under capitalism, inequality is inevitable, because higher-skilled workers earn more and those with higher incomes keep acquiring income-generating assets.
How can high inequality harm economic growth?
Extreme inequality becomes a disincentive to work, so labour is used inefficiently, national output falls and economic growth slows.
What effect does high inequality have on social stability?
Less equal societies tend to experience political instability, social unrest and, in extreme cases, revolution.
Define direct tax.
A direct tax is a tax imposed on income and profits that is paid directly to the government by the individual or firm.
Define indirect tax.
An indirect tax is a tax imposed on spending, so the less a consumer spends the less indirect tax they pay.
Give three examples of a direct tax.
Examples of direct taxes include income tax, corporation tax, capital gains tax and inheritance tax.
Define a progressive tax.
Under a progressive tax, as income rises a larger percentage of income is paid in tax.
Define a regressive tax.
Under a regressive tax, as income rises a smaller percentage of income is paid in tax.
Define a proportional tax.
Under a proportional tax, as income rises the same percentage of income is paid in tax.
True or False?
All indirect taxes are progressive.
False.
All indirect taxes are regressive, because they take a smaller percentage of income as income rises.
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.
True or False?
The more a consumer spends, the less indirect tax they pay.
False.
The less a consumer spends, the less indirect tax they pay, since indirect taxes are imposed on spending.
The tax rate represents the amount of additional tax paid for every additional dollar earned as income.
The marginal tax rate represents the amount of additional tax paid for every additional dollar earned as income.
How is the average tax rate calculated?
The average tax rate equals total taxes paid divided by total income, multiplied by 100.
What happens to marginal tax rates as income increases?
Marginal tax rates increase as income increases.
How can regressive indirect taxes undermine a progressive tax system?
The benefits of a good progressive tax system can be eradicated by the penalties imposed through multiple regressive (indirect) taxes.
What is the general aim of policies used to reduce poverty?
Any policy that helps to break the poverty cycle at any point will improve the standards of living within a country.
Define a transfer payment.
A transfer payment is a payment usually given by the government to the poorest and most vulnerable people in society.
Give examples of transfer payments.
Transfer payments include unemployment and disability payments, pension payments, heating discounts and public transport subsidies.
Define a national minimum wage.
A national minimum wage is a legal wage set above the free market rate that firms are not allowed to pay below.
Define a universal basic income (UBI).
A universal basic income (UBI) is a guaranteed minimum income level paid by the government to each individual in society.
How does investing in education help to alleviate poverty?
Investing in education is a supply-side policy that raises human capital, increasing productivity, output and income.
Investing in human capital increases potential output by shifting the production possibility frontier .
Investing in human capital increases potential output by shifting the production possibility frontier outwards.
True or False?
A national minimum wage is set below the free market wage rate.
False.
A national minimum wage is set above the free market rate, so firms are not allowed to pay below the legal rate.
How can reducing discrimination lower income inequality?
Reducing discrimination removes social exclusion and inequalities of opportunity, improving productivity and raising wages.
How does targeted government spending reduce poverty?
Targeted government spending on the greatest needs, such as more schools, teachers or hospitals, raises human capital, productivity and income.
True or False?
Unlike a universal basic income, transfer payments are targeted at the poorest and most vulnerable in society.
True.
Transfer payments are directed at the poorest and most vulnerable, whereas a universal basic income is paid to every individual in society.
How can a universal basic income help to reduce unemployment?
By guaranteeing a minimum income for all, a UBI improves human capital and the labour offer, helping to decrease unemployment.
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