Inequality – AS/A LEVELS/IB/IAL
Inequality – AS/A LEVELS/IB/IAL
Level: AS Levels, A Level, GCSE – Exam Boards: Edexcel, AQA, OCR, WJEC, IB, Eduqas – Economics Revision Notes
Inequality is the unequal distribution of income and opportunity between different groups in society.
What is the difference between income and wealth?
Income is a flow concept, e.g. the money earned over a period of time. This is usually generated from a salary.
This is a stock concept and to do with the assets a person owns. E.g. property, shares, car, yacht etc.
What can be used to measure Income Inequality
The Lorenz Curve
The Lorenz curve highlights the income distribution of a country against its population.
The further the Lorenz curve is from the 45-degree line, the less equal the distribution of income will be.
Perfect equality would be, for example, where 50% of the population gain 50% of the income or 70% of the population gain 70% of the income.
The Gini coefficient is area A/A+B
- A Gini coefficient of zero expresses perfect equality, where all values are the same (for example, where everyone has the same income).
- A Gini coefficient of one (or 100%) expresses maximal inequality among values (e.g., for a large number of people, where only one person has all the income)
Causes of wealth and income inequality
- Age – those who have been working for years will earn a higher income than those who are just starting work and hence would have had the chance to build up more assets
- Wages – higher educational achievements, better developed skillsets and working longer hours will typically mean that these individuals are able to earn a higher wage and employers will demand more of this labour
- Existing Wealth Levels – those who have a higher level of wealth are able to continue to build larger wealth than those on lower levels of wealth
- Political Factors – some countries have been restricted due to wars, environmental factors (droughts and earthquakes)
Impact of economic change and development
This hypothesis suggests that as society develops and moves from one industry to another, wages differences will grow and this causes inequality
Piketty argued that inequality will rise as the rate of return on capital grows and the country develops
Significance of Capitalism
- Wage differentials – income inequality arises in a capitalist economy and is likely to grow due to wage differentials caused by changes in the demand and supply of labour
- Economic Growth – it can be argued that for capitalism to be effective, inequality will arise. It incentivises people to want to gain more, hence take more risks and invest greater – all essential for economic growth
AQA Spec – Additional Content
The difference between Equality and Equity
This refers to the idea that everyone has the same income – there is an equal distribution of wealth and income in society
This refers to what is considered to be an acceptable distribution of income and wealth, to create fairness in society
The likely benefits and costs of more equal / unequal distributions
Monopolies can charger higher prices to earn greater supernormal profits, this exploits consumers and reduces their consumer surplus
Inequality may motivate workers and encourage them to learn new skills to develop their skillset. Greater productivity is reflected through a higher wage rate and this leads to wage inequality
Income Redistribution and Wage Equality
Government Intervention can lead to Income Redistribution & Wage Equality through certain taxes and by the provision of free goods / services which everyone has access to
Demotivate those on a lower income
Negative Externalities are likely to arise due to an unequal distribution of income, demotivating those on lower incomes
Quick Fire Quiz – Knowledge Check
1. Define ‘Inequality’ (2 marks)
2. Explain the difference between ‘income’ and ‘wealth’ (4 marks)
3. Explain what a Lorenz Curve shows (4 marks)
4. Explain what the Gini Coefficient shows (3 marks)
5. Interpret a Gini Coefficient of 0, and compare that to Gini Coefficient of 100 (4 marks)
Next Revision Topics:
- Poverty & Inequality
- Strategies to promote growth and development
- Measuring Growth / Economic Growth
- What factors limit Growth and Development?
- National Minimum Wage
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