A LEVEL EDXECEL ECONOMICS Chapter 72 Inequality and Poverty.pptx

A LEVEL EDXECEL ECONOMICS Chapter 72 Inequality and Poverty.pptx

1. Economics A Theme 4 – A Global Perspective Inequality and Poverty Teacher: Mr Moosajee Twitter: @BusEconYMO_HGS (The Mr Moosajee)

2. Lesson Objectives Inequality and Poverty Define and distinguish Absolute Poverty and Relative Poverty, and analyse the causes and effects of both Explain how absolute poverty and relative poverty can be measured Construct, interpret and analyse the data presented on Lorenz Curves, and interpret Gini Coefficients and the Gini Index to measure income inequality Analyse how a variety of interlinked factors influence the differences between individuals, and households, incomes and wealth Analyse the significance of capitalism, economic change and development, in causing wealth and income inequality Analyse the causes of income and wealth inequality within countries and between countries, and how patterns of inequality change with development and time Explain how there can be conflicts between efficiency and equity, and how government policies can cause both inefficiency and inequity

3. Resource Allocation: Inequality and Poverty The basic State Pension is a regular payment from the government that you can get when you reach  State Pension age , For us, that is 68 The maximum amount paid out is £ 137.60  a week (£7,155.20 a year) T im Cook (Age 61) – CEO Apple Inc 2021 earnings: $99,000,000 ( $3 million annual salary, $82.3 million stock award, and a $12 million cash bonus ) (Also 1,447 times the earnings of a typical Apple employee )

4. Resource Allocation: Equality, Equity and Efficiency Income distribution in an economy is the product of interactions between market dynamics and government intervention Such interactions may increase or decrease the levels in equity and equality of resource allocation Markets are impersonal. We have analysed how different market structures can result in allocation of resources which are inefficient, unequal and inequitable We have also examined how forms of government intervention have, in the main, resulted in exacerbating these effects. This term we will evaluate the ways in which markets allocate resources: on the basis of equality and equity ; the effects of government intervention, and look the effects of these on the world

5. Resource Distribution: Market Economies – Questions Explain some of the different ways individuals generate income in market economies Analyse how the forces of demand and supply may affect their incomes and wealth State and analyse how other factors may further increase income and wealth inequality Using examples, explain why it may be necessary for governments to provide some form of provision for the poor, and what forms of assistance this may take

6. Causes of Income Inequality in a Market Economy Earnings and income: Some workers earn more than others. The demand and supply of workers and their skills explains that, well, in part at least. Unemployment: people who do not work tend to have lower incomes than people who do. Aging populations, and the long-term unemployed is also resulting in increasing poverty figures Physical and financial wealth: Nothing generates wealth quite like wealth. Either through inheritance, appreciation or multiplication Household composition: Sole breadwinners; DINKs, Boomerangs, plus are we measuring total household income, or each individuals’ earnings? Government policy: How are we taxed, and how is this redistributed within the economy?

7. Causes of Income Inequality: Trickle-up Inequality in a Market Economy The level of competition in the goods market: The more competitive the market, the closer price is to MC. However, the more imperfect the market becomes and the closer firms’ output moves away from P=MC towards MC=MR, the more likely the misallocation of resources, and an irrevocable deadweight welfare loss to society. Effectively, supernormal profits are a tax on consumers by firms

8. Causes of Wealth Inequality Wealth can take a number of forms: Property Wealth – residential, commercial and land Physical Wealth – personal property, antiques, furniture, cars Financial Wealth – personal savings, stocks and shares, bonds Private Pension Wealth – personal and occupational pensions, on top of state pension provision

9. Causes of Wealth Inequality There are different ways of accumulating wealth, for example through saving a proportion of your income or by buying assets, instead of funding consumption. However, this is only possible if you have a high enough income to be able to save a portion. Obviously, the more you save and the more you can save, the faster your wealth stock increases. It is possible that the value of these savings, or physical and financial assets can, increase in value faster than incomes are rising, and as a result are contributing to increasing income inequality, as the rich get richer, and the poor stay poor. Analyse how the four factors below all potentially contribute to increasing levels of income inequality: Income levels Wealth levels Inheritance Chance

10. Measuring Inequality: Lorenz Curve

11. Measuring Inequality: Gini Coefficient This is calculated by dividing the area between the Lorenz Curve and the 45° line (A) by the whole area under the 45° line (B), such that G = A / (A+B) Gini Coefficient values are between 0 and 1. The higher the value , the greater the level of inequality. The Gini Index multiplies the result by 100 The link above explains how the Gini Coefficient is calculated. This links to a video on the Gini Coefficient, and another on how to calculate a Gini Coefficient

12. Measuring Inequality: Question 2, page 450 On your graph paper, draw Lorenz Curves for the UK showing the distribution of Disposable Income in 1979, 2002/03, and 2012-13 Google ‘ Gini Coefficient Calculator ’ and visit: http://shlegeris.com/gini . Use the site to calculate the Gini coefficient for 1979, 2002/03, and 2012-13 Comment on the income distribution in each of these years, and what you think may have happened to the levels of and types of taxation levied, and to whom benefit payments moved towards, between 1979 and 2013 Comment on what you think will have happened to the UK’s Gini coefficient between 1979 and 2012-13

13. Income Inequality in the UK is on the rise Gross and Net Income

14. The Scale of Economic Inequality in the World

15. Examinations essay questions From Edexcel A Level Paper 2 SAM Over the past 25 years, income inequality has been increasing in many developed countries. For example, from 2007 to 2011 Spain’s Gini coefficient rose by 6.0 percentage points, and Ireland’s by 6.6 percentage points. Evaluate the factors which may have caused this increase in income inequality. Refer to a developed economy of your choice in your answer. (25 marks) From Edexcel A Level Paper 2 Specimen The Australian government is temporarily increasing the top marginal rate of income tax by 2 percentage points. Incomes over 180 000 Australian dollars will be taxed at a marginal rate of 49%. This measure is expected to affect around 400 000 taxpayers and to raise 3.1 billion Australian dollars in revenue. Evaluate the likely impact of this tax rise on the Australian economy. (25 marks)

16. What is poverty? There is no single definitive definition of poverty, but this World Bank definition covers some of the key points: "The most commonly used way to measure poverty is based on incomes. A person is considered poor if his or her income level falls below some minimum level necessary to meet basic needs. This minimum level is usually called the "poverty line". What is necessary to satisfy basic needs varies across time and societies. Therefore, poverty lines vary in time and place , and each country uses lines which are appropriate to its level of development, societal norms and values.“

17. What is poverty? There are three current classifications of poverty in common usage: absolute poverty, relative poverty and social exclusion.  Absolute poverty is defined as the lack of sufficient resources with which to keep body and soul together. This means you would not be able to afford basic essentials, for example food, shelter and/or clothing Relative poverty defines income or resources in relation to the average. It is concerned with the absence of the material needs to participate fully in accepted daily life, and as such are excluded from ordinary living patterns Social exclusion is a new term used by the Government as “a shorthand label for what can happen when individuals or areas suffer from a combination of linked problems such as unemployment, poor skills, low incomes, poor housing, high crime environments, bad health and family breakdown"

18. Absolute and Relative Poverty Absolute poverty  refers to a set standard which is the same in all countries and which does not change over time.  An income-related example would be living on less than $1.90 per day (World Bank figure (2012) or $1.25 (UN figure (2015) How much are these per annum? Explain why it would be close to impossible to survive on that level of income in the developed world? Is there absolute poverty in the UK? Which parts of the world have the largest concentrations of absolute poverty? What forms of social protection exist to support the poor in developed economies, which considerably reduces the numbers of people living in absolute poverty?

19. Absolute and Relative Poverty Relative poverty   is defined in terms of the society in which an individual lives, and will therefore differ between countries and over time.  How did Adam Smith define relative poverty? How does the EU define relative poverty? What factors might explain why the UK has the highest poverty rates in the EU? How does an increasing level of economic development lead to a changing definition for relative poverty over time? What has happened to absolute and relative poverty in the UK ?

20. Causes of Poverty Poverty is associated by a number of interlinking causal factors. Explain how these factors cause poverty: Unemployment and underemployment Lack of human capital, education and training Lack of financial capital, and access to credit Lack of infrastructure, physical and intellectual capital Physical and mental health problems Dependency, poverty traps, and benefits traps Inheritance and lack of income redistribution The Cycle of Poverty Weak, inefficient or corrupt governments and civil service War

21. Poverty in Developing Countries Over the past years, the number of people in absolute poverty who living in the developing world has declined significantly, falling by over 20 per cent. However, if China’s figures are excluded, the decline in the number of people living in absolute poverty has only fallen by 10 per cent. Using the graph on the next slide, and your own judgement, explain why.

22. Power inequalities and poverty In many countries, poverty is further perpetuated dues to high levels of social exclusion, and because power and wealth is unequally and inequitably distributed. Power can come in different forms: Political – those who are better-off, or already in positions of power, are likely to want to stay that way. This means they tend to dominate positions of power and set agendas and policies which keep them powerful Economic – nothing creates wealth and incomes quite like wealth. This means that inequality is likely to increase if there is a low level of income redistribution. Look at how many of the rich and powerful were named in the ‘ Panama Papers ’. Bonded labour , also prevents people from earning their own money, and moving out of poverty Social/Cultural – This could take the form of excluding some people from society or support networks (the elderly, widows, the sick, migrants, children born to unmarried parents), or perpetuate stereotypes of some groups of people, who might be from different religions, ethnic minorities or even within the same minorities or religions

23. The Effects of Poverty The effects of poverty depend on how it is defined: What are the effects of Absolute Poverty? What are the hazards, associations and effects of Relative Poverty?

24. Causes of Changes in Absolute and Relative Poverty Absolute poverty tends to fall as GDP rise, and developed economies tend to have lower levels of poverty. Explain some of the reasons why increasing GDP, and GDP per capita does not guarantee a fall in absolute poverty, and what this may be needed to eliminate it. Analyse, using examples, how the two factors below can cause changes in the levels of relative poverty Changes in the market mechanism over time Changes in relative incomes through government intervention

25. Horizontal and Vertical Equity Inequalities are not always necessarily unfair. If two workers do an identical job, a worker who works twice as many hours should be paid twice as much. Unemployed people and pensioners who have not worked or saved would be poorer than workers or savers. However, in Economics we consider EQUITY (fairness) to distinguish this from inequality

26. Horizontal and Vertical Equity Horizontal Equity – individuals receive identical treatment in identical situations. However, this may lead to inequitable outcomes Explain why there are many cases of inequitable treatment in society with horizontal equity. What might be done to try and prevent this? Vertical Equity – As everyone is different, different treatment is given to people with different characteristics than others to promote greater equity. However, there are problems with this. Explain why people do not receive the same standards of healthcare, education and job opportunities, even though vertical equity would imply everyone should have equality of opportunity?

27. Equity versus Efficiency Governments intervene in markets. Why is this necessary, and what forms might these interventions take? Why might such intervention lead to an increase in economic and allocative inefficiency in a free market? Explain why are there no pure free market economies in practice? Using examples, explain why the Theory of Second Best suggests economic and allocative efficiency will increase if welfare payments and subsidies are provided?