Chapter 8: Distribution

Overview Income Distribution & Wages and Salaries Income Inequality Interest Income, Savings, Rental Income & profit Circular Flow & Gross Domestic Product Causes of Income Inequality Government Programs to Reduce Poverty Who Is Poor? Regional Income Inequality

Income Distribution Three basic economic questions are: “What to produce?” “ How to produce it?” & “For whom to produce?” Supply and demand will answer this question in the productive resources market in the form of wages, rent, interest and profit.

Wages & Salaries Increases in demand and decreases in supply cause wages to be higher whereas decreases in demand and increases in supply cause wages to be lower

Demand, Supply & Wages of Plumbers in a Canadian City (fig.8.2/8.3) p. 160 D2 Shortage Number of Plumbers (wages per hour (dollars)

A decrease in the demand for plumbers D2 Surplus Number of Plumbers (wages per hour (dollars)

S2S2 A Decrease in the Supply of Plumbers Shortage Number of Plumbers (Wages per hour ($)

S2S2 An increase in the Supply of Plumbers Surplus Number of Plumbers (Wages per hour ($)

Factors Affecting Wages & Salaries Government regulations – minimum wage and fringe benefits Labour unions Large employers Mobility of workers Barriers to entry – specialized training, discrimination

Interest Income Price paid to a lender for the use of a sum of money over a period of time

Savings Part of income that is not spent on goods and services

Rental Income Payment for the use of a resource, specifically land

Income from Profits What is left over after all the costs have been paid for from the revenue earned by the business (i.e. Total Revenue – Total Costs) Reward to the entrepreneur for taking the risk of starting a business Prime motivator to start a business and run it well to satisfy the wants and needs of consumers

Circular Flow

Gross Domestic Product (GDP) The total value at market prices of all final goods and services produced in Canada over a period of time (usually a year) Expenditure approach = Consumption + Investment + Government + (Exports – Imports) or C + I + G + (X - M) Income approach = wages + rent + interest + profit – (depreciation + indirect taxes)

Income Inequality Lorenz Curve is a graph that helps illustrate the income inequality in a society by contrasting perfect equality with reality within a given economy

Causes of Income Inequality Natural ability Education, training and opportunity Property ownership Ability to influence wages and salaries – labour unions and professional associations Discrimination – women and minorities Poor health or physical disability Region or residence – Ontario higher incomes than Newfoundland Luck – lottery, accident Weeks worked Age

Government Programs to Reduce Poverty Investment in human capital (i.e. education and skill training) Keep economy operating at a high level to provide jobs Safety programs to protect workers and universal health care Old age security pension, unemployment insurance, welfare, C.A.P.

Who is Poor? $15, 067 (in 1992) for a family of four in a mid- sized Canadian city according to Professor Sarlo House of Commons Conservative sub-committee  menu of basic needs with differences in cost of living from location to location taken into consideration Statistics Canada Low Income Cut-Off (L.I.C.O.)  spend 70% or more on three essentials (food, clothing, shelter) 12% of families and 30% of unattached individuals below the L.I.C.O. line

Regional Income Inequality Ontario, Alberta and British Columbia wealthier Maritimes and Quebec poorer