Inequality (Edexcel A Level Economics A)

Inequality

• Income and wealth inequality are two different concepts

  • Income inequality refers to the unequal distribution (flow) of income to households i.e rent, wages, interest and profit

  • Wealth inequality refers to differences in the amount of assets that households own

• The two main measures of income inequality are the Lorenz Curve and the Gini coefficient

The Lorenz curve

• The Lorenz Curve is a visual representation of the inequality that exists between households in an economy

• Data is commonly presented in quintiles (population divided into 5 groups i.e 20%) or deciles (population divided into 10 groups i.e 10%)

  • E.g. in 2021 42% of the income flow in the UK went to the top 20% of households while only 7% went to the bottom 20%

• Perfect income distribution is not the goal (20 % of the population get 20% of the income; 40% get 40% percent of the income etc.)

  • That would equate to socialism and completely remove incentives for work as everyone would be paid equally

• More equal income distribution is desired as it reduces poverty and social unrest

  • What constitutes acceptable income equality is a normative economic issue

Diagram analysis

• The line of equality represents perfect income distribution (not desirable)

• In the UK the bottom 20% of households receive 5% of the income flow while in Sweden they receive 9% of the income flow

• In the UK the top 10% of households receive 45% of the income flow while in Sweden they receive 25%

• Sweden has a more equal distribution of income than the UK

The Gini coefficient

• The Lorenz curve can be used to calculate the Gini Coefficient

Diagram explanation

• 

• A represents the area between the line of equality and the UK Lorenz curve

• B represents the area under the Lorenz curve

• A value of 0 represents absolute equality (socialism) and 1 represents perfect inequality

• In 2022, the USA coefficient was .41 as compared with the UK value of .35

  • The distribution of income in the UK was more equitable than in the USA

Causes of Income & Wealth Inequality

• Numerous factors cause wealth and income inequality

• It is generally true that developed countries have a larger tax base and are able to provide a better level of support to the poorest households the economy, than developing countries are able to
  

Cause of Wealth and Income Inequality

Impact of Economic Change & Development on Inequality

• In the 1950's Simon Kuznets developed a hypothesis that described how income inequality changed as an economy went through stages of industrialisation and development

  • This hypothesis was explained using the Kuznets Curve

• Industrialisation results in increased inequality as some workers move from the lower productivity, lower paid agricultural sector into the higher productivity manufacturing sector

  • There is now greater income inequality with the workers left behind

• However, at some point, inequality starts to decrease

  • This is most likely due to government intervention/support funded by increased state tax revenue brought about as a result of the increased production in the economy

Diagram analysis

• As a country changes sectors from primary (farming) to secondary (manufacturing), productivity increases and the per capita income increases

• However, inequality is also increasing as the gap in wages between the primary and secondary sector is significant

• At some point, the economy will reach a turning point of income where inequality begins to fall

  • This often occurs as the primary sector diminishes while the secondary and tertiary (services) sectors increase

  • Developed economies tend to generate more income from secondary and tertiary sectors

Capitalism & Inequality

• Capitalism is at the heart of free market economics

• Under Capitalism, inequality is inevitable

  • Workers with higher skills receive higher wages

  • Workers with little to no skills receive little to no wage

  • Individuals with higher income will acquire more assets leading to higher levels of income

    • In turn, they can keep on acquiring assets

  • Individuals with lower income will find it hard to acquire assets

• The principles of capitalism are considered important as the incentive to acquire income raises productivity and output

• The long-term cost of capitalism is that the factors of production become concentrated in ownership with relatively few individuals developing extreme wealth, at the expense of many who lose out

• It has been argued that capitalism needs checks and balances to limit the income and wealth inequality that will naturally develop

  • This calls for government intervention