Distribution of Income and Wealth

A2 Economics

Aims and Objectives

Aim:

• Understand the distribution of income in the UK

Objectives:

• Define distribution of income

• Explain measures of inequality: Lorenz Curve, Gini Coefficient

• Analyse UK income inequalities

• Evaluate methods of government intervention

Starter

• Define income

• Define equity

• Define wealth

UK Income Profile

Distribution of Income

Definition: how income is shared out between factors of production

• More equal than the distribution of wealth.

• Can be measured by factor of production, between households and between regions.

• Article

Measuring The Distribution of Income: Lorenz Curve• A method of measuring the degree of inequality in

the distribution of income and wealth is the Lorenz Curve.

Measuring The Distribution of Income: Lorenz Curve• Horizontal axis = cumulative % of population

• Vertical axis = cumulative % of income earned

• 45 degree line = perfect equality i.e. the bottom 40% of population earned 40% of income.

• The actual cumulative percentages are then plotted

• If inequalities exist this line falls below the 45 degree line.

• The greater the inequality the further the curve will be below the 45 degree line.

Which country is income distributed more unevenly?

Measuring The Distribution of Income: Gini Coefficient

• A statistical measure of the degree of inequality shown on the Lorenz curve is the Gini Coefficient

• Ratio of the area between 45 degree line and the Lorenz curve divided by the total area below the 45 degree line.

• (a / a + b)

• Perfect equality ratio of 0

• Perfect inequality ratio of 1

• Closer it is to 1 the more unequal the distribution of income

Trends in UK

The Distribution of Income: Inequalities

• Distribution has become more unequal in recent decades.

Due to:

• Reduction in top rates of income tax

• Privatisation lead to rise in executives pay

• Real value of benefits such as Job Seekers Allowance fell

• % of single parent households not in work doubled between 1975-2000.

The Distribution of Income: Inequalities

• Brainstorm in groups what you feel the causes of inequality between household income are.

Causes of Income Inequalities Between Households

• Free market would not provide benefits and inequalities would be large

• Gov intervenes to lessen these inequalities

Impact of the State

• Wealthier household will be able to earn more through dividends and interest from their assets.

Wealth Inequality

• Different households will have different numbers in employment.

Household Composition

• People with skills and qualifications will tend to earn more. These differ between households.

Skills and Qualifications

• Part time workers earn less than full time• White earn more than black on average

etc

Earnings Differences

Government Intervention

• Brainstorm in groups methods of government intervention to influence wealth and income distribution in the UK.

Government Intervention Methods

• Progressive taxation

Taxation

• Means tested e.g. income support.• Universal e.g. child benefitMonetary Benefits

• Provision of education, health care to give all citizens equality of opportunity.

• Funded through taxationDirect Provision of

Goods/Services

• NMW, anti discrimination policies.Legislation & Labour Market

Policy