Income
Unit 11 - Lesson 3
Learning outcomes:
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Income Distribution
From the Circular Flow Model we discussed we know that Households provide Firms
with the Factors of Production and in return the Firms provide Households income.
Ownership of these Factors of Production is highly unequal because the prices for these
factors of production vary greatly within the market.
Education levels of the population vary greatly and therefore the income individuals
receive will vary from very low to very high.
Free markets cannot ensure that everyone in society will receive a wage that covers
their basic needs.
Governments intervene to redistribute this income in the attempt to make sure everyone
can cover these needs.
http://ingrimayne.
com/econ/AllocatingRationing/Figure
6.5.gif
Lorenz Curve
Diagonal Straight Line: Income Equality
Bolivia & Belarus
Belarus has greater Income Equality
Point a & e: 20% of the population in Bolivia (a)
makes less than Belarus (e)
Points d & h: 80% of Bolivians make 40% of the
income vs. 60% in Belarus.
The further away the curve is from the equality line
the more unequal distribution of income.
Gini Coefficient
Summarizes income inequality contained in the Lorenz Curve.
Number between 0 and 1.
Calculated as the total area under the diagonal line and the above the
curve.
https://community.lithium.com/t5/image/serverpage/image Closer to 0 = greater income equality
id/572i69A06E78B5D117FC?v=mpbl-1
Closer to 1 = greater income inequality
Income Redistribution
Governments use many ways to try and
reduce the inequality in the distribution of
income such as taxes. We will take a look at
these more closely later.
As government redistribute income their goal
is to reduce inequality and bring more equity
in income.
This is shown as a shift inwards on the
Lorenz Curve.
http://images.huffingtonpost.com/2014-12-19InclusiveGrowth.jpg
Relative Poverty
Compares incomes of individuals &
households and compares them with the
median income in society.
Relative Poverty looks to measure the
number of people who are not able to
afford the good and services that is
considered typical in society.
Typical is measured by the median
income level of society and the lifestyle in
that country.
http://www.oxfamblogs.org/fp2p/wpcontent/uploads/Measuring-poverty-cartoon.jpg
Causes of Poverty
1. Low income
2. Low level of Human Capital education & skills
3. Unemployment
4. Low levels of Capital/Land
5. Discrimination
6. Geography
7. Age
8. Limited Social Services provided
by Government
9. Education, Health, & Housing
10. Poverty Cycle
http://blogs.baruch.cuny.
edu/overcomingadversity/files/2013/11/poverty-cycle1.jpg
Consequences of Poverty
1. Low living standards: poor health,
poor diet & psychological problems
2. Low access to health & education
3. Higher infant & maternal mortality
4. Higher levels of preventable
diseases
5. Social problems
6. Inability to meet full potential
therefore economy not using the
resources efficiently
http://www.ascd.
org/ASCD/images/publications/books/jens
en2009_fig1.1.gif
Transfer Payments
Payments made by the Government
with the intention of redirecting
income to those most in need.
Examples include:
1.
2.
3.
4.
5.
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Government Intervention
Forms of Government Intervention
include:
1.
2.
3.
4.
Minimum wage
Food price ceilings
Rent controls
Price Floors for farmers
https://www.hermetas.com/wpcontent/uploads/2015/04/minimum-wage-.jpg
Taxes
Taxes help to redistribute the wealth and subsidize the Merit goods
provided by the Government.
Direct Taxes:
Indirect Taxes:
1.
2.
3.
4.
1.
2.
3.
Sales Tax
Excise Taxes: Gas, cigarettes
Custom duties/tariffs