Macro hw

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With reference to Extract 1, explain the difference between

absolute and relative poverty. (5 marks)

Absolute poverty is a standard which is the same in every

country in the world. It is often defined as people not having the minimum

income to be able to meet the minimum requirements for one or more basic living

needs over an extended period of time. Currently the figure for absolute

poverty minimum income is $1.90 a day having been raised from $1.25 a day. Any

person whose income falls below this income is acknowledged as being in

absolute poverty, no matter where they live. Alternatively, relative poverty is

country specific. Relative poverty defines poverty in terms of what country a

person lives often depending on the median income of the country. For example

in the UK people are defined as relatively poor if they earn fewer than 50% of

median income. It is possible for one version of poverty to rise and the other

to all, as seen in China where relative poorness if growing due to the diverse

employment wages of those who are entrepreneurs and those who are rural

workers. Although absolute poverty is falling as overall Chinas economic

development has improved.

With reference to figure 1, explain how income inequality is

measured. Illustrate your answer with a Lorenz curve diagram. (8 marks)

The lorenz curve is a measure of the distribution of income in a society. The curve shows the proportion of national income earned by a certain percentage of a population. On the Lorenz curve, the further away the curve is from the 45 degree line the higher the income inequality is. The Lorenz curve can also be used to work out the Gini coefficient which measure the exact degree of inequality of income within a population. The Gini coefficient is worked out by the equation A/(A+B) and is a ratio between the curve and the half of the square. I score of 0 on the Gini coefficient would show perfect equality whereas a score of 1 would show perfect inequality.

To what extent is income inequality an essential ingredient

of capitalism? (10 marks)

Capitalism is an economic system where a country's trade and industry are controlled by private owners for profit, rather than by the state. Minimal government intervention is required, and resources are distributed according to free market.

It can be said that inequality is important as it acts as a motive for workers. Higher wages are often associated with those who have higher skills developed by training a persistence. If incomes are all the same no matter how highly skilled people became, then people will just not be motivated to take part in further training and education as there would be no financial benefit to them. So although under the merit based capitalist system there is a creation of income inequality, it can be said that this is vital to ensure people pursue higher skilled careers.

If income inequality didn't exist then higher skilled jobs will be underemployed. Underemployment will reduce the amount of supply of skilled industries such as medicine. A reduction in supply means that there will an excess of demand for industries such as medicine, this will then able doctors to charge higher wages and take advantage of the high demand for them, resulting in inflation. It is then necessary for inequality to exist in capitalism to avoid inflation.

Inequality is then a vital part of capitalism, and without it capitalism wouldn't be able to function. In capitalism there just isn't a level playing field, some people are more advantaged than others, there isn't equality of opportunity and there will be inequality that is needed to keep capitalism alive.

With reference to the information provided and your own knowledge,

assess the likely reasons for the change in inequality within countries. (12

marks)

Currently there are many factors that could be responsible for the changes in inequality within countries. Inequality is often applied to income where some people may earn large incomes in comparison to others.

One reason why there is a change in inequalities is due to economic growth. Economic growth can be said to increase inequality as it often benefits the people who have higher skills and training than those who don't. For example economic growth in the UK has been focussed mainly around the territory sector in services which often requires highly educated workers. However the UK has also seen a decline in its manufacturing industry which often require people with less education than those in the territory sectors. Thus economic growth has increased inequality as its provided jobs for those who have skills and very few for those without skills.

Another reason why there is a change in inequalities is because of rise of income of the richest people which has increased inequality. Inequality occurs when the wages of the highest paid rise faster than the average wage. This fast growth in wages increases the wage gap between those who are the richest in the country and those who are the poorest in the country. Although it could be said that this would not have an impact on the classification of those in relative poverty as the band is worked out using median income which would not be impacted from higher wages of the 1%.

Lastly a reason for inequality is capitalism. Capitalism is based on competition, all the firms compete with each other in order to try and maximise their profits and try to achieve a comparative advantage. In order for these firms to be able to remain competitive they must keep costs as low as possible, this often reflects negatively on the wages of their workers. This has been the most seen via migration of firms to countries that how low or no minimum wages. A prominent example is China where the firm owning entrepreneurial class how been becoming richer and richer due to profits they are making by paying their workers little. Capitalism then can cause large inequality as it causes the exploitation of workers. However it can be said that workers may be better off in comparison with the alternative. In China urban factory work is an alternative to rural work that has even lower wages associated with it. It can then be said that capitalism has reduced the income inequality of those who have migrated from rural regions to work in urban regions. On the other hand for those still in rural areas, they will no suffer the highest inequality due to capitalism. Looking at China as a whole the difference between the wages of those still in rural regions and the entrepreneurs of the firms in urban regions are goring bigger and bigger each day capitalism advances.

Overall there are many reasons that can cause inequalities to both rise and fall within countries over time. It could be said that the reasons vary from country to country depending on how developed they are. For example economic growth tends to have a more negative impact on countries that are already developed whereas capitalism in emerging economies seems to be the force behind rising inequalities.

Evaluate policies which a government could employ to reduce

inequality within it country. (15 marks)

Inequality if often viewed in terms of income inequality within countries, however it can also include social inequality when looking at things such as standards or living. There are a number of policies that the government could implement to combat inequality within a country. Policies that could be introduced are things such as a progressive tax system, a benefit system and improvements to the education system.

One policy governments could implement is a progressive tax where

those who earn higher incomes will have to pay more tax than those who earn

lower incomes. Income tax is a progressive tax system that could be used.

However a progressive tax system will take more of people incomes the higher

they earn, it may act as a disincentive for people to earn more. If people are

just above a tax band then they will be less well of than those who fall just

below the tax band. Although the difference in income earnings may only be

slightly different, the difference in how much tax they will have to pay will

be large. However tax earnings will be redistributed via the welfare state to

those who have little income. It can then be said that a tax system will reduce

inequality amongst the poorer areas of a country however will increase

inequality between higher earners. Furthermore if tax is set too high and many

people see it as unfair then there will be an increase in tax avoidance,

meaning there will be less wealth redistributed to those with low incomes.

Another way that inequality can be reduced then is by providing a benefit system, redistributing the income generated by taxes to poorer people. One type of benefit that can be used would be cash contributory and non-contributory benefits, which target the poorest of a country. Contributory benefits work by replacing earnings when individuals are not able to work due to things such as illness, disability or age. Examples of contributory benefits would be pensions and job-seekers allowance. Contributory benefits will help reduce inequality as they specifically target those who's incomes are limited, raising them to reduce the income gap. Non-contributory benefits aim to help individuals with the costs of general living. Non-contributory benefits are not means-tested, instead individuals just have to fit the criteria to claim them. As they are not means-tested it could be said they are easier to fraud in comparison with contributory benefits, this would be a negative to this benefit system and could increase inequality. Examples of non-contributory benefits include things such as housing benefit and child support. Non-contributory benefits will help reduce inequality as they will improve the standards of living of people which is an important factor when trying to uplift people out of poverty.

Another policy that governments could introduce is education,

and this is probably the most important policy if the country has certain

regions with unemployment. If more money is invested into education then a

higher skilled workforce can be created. However it must be ensured that

funding for education is not necessirlyily focused on supplying larger

quantities, but instead increasing the quality of the education. Furthermore

providing education may mean people move away from the area they are in and to

cities following the pursuit of jobs aimed at high skilled people offering high

wages. This means that industry’s in the original area will still remain

impoverished and there will still be high inequality between in and other

regions. Also if everyone went into high skilled careers due to receiving high

education then there would be a lack of labour for low skilled jobs. This could

cause wages for these industries to rise, such as plumbers, which would help

reduce inequality. However it would be more costly for people to buy these

services increasing inequality, as some basic needs may then not be able to be

met.

Overall all of these policies are generally impactful in reducing inequality within a country. However it can be said that these policies must be efficiently planned and monitored to ensure the right individuals and areas are receiving them. For example education improvements should be mainly made in areas with poor education standards and benefits should only be given to those who generally need them. If policies are not monitored it could lead them to be exploited which may have the reverse effect than what they are intended to achieve.