1. AQA 1.7: The Distribution of Income and Wealth: Poverty and Inequality
How is wealth distributed:
Within the UK
Globally?
Do you think inequality has improved or got worse over time?
AQA 1.7: The Distribution of Income and Wealth: Poverty and Inequality
Wealth inequality in the UK
Global Wealth Inequality - What you never knew you never knew

2. 1.7.1 What you need to know The difference between income and wealth
The various factors which influence the distribution of income and wealth
The difference between equality and equity in relation to the distribution of income and wealth
The Lorenz curve and Gini coefficient
The likely benefits and costs of more equal and more unequal distributions
Some knowledge of the distribution of household income and wealth in the United Kingdom is expected
Students should understand that the degree of inequality can be measured but that whether or not a given distribution of income is equitable (fair and just) involves a value judgement
Students will be expected to interpret measures of inequality such as the Gini coefficient but they will not be expected to calculate the Gini coefficient
Students should understand that excessive inequality is both a cause and consequence of market failure. They should also appreciate that value judgements will influence people’s views of what constitutes an equitable distribution of income and wealth and that these views will influence policy prescriptions

3. Distribution of income and wealth
The distribution of income and wealth looks at the differences for individuals and households
This might be geographically, occupationally, by gender etc.
An individual’s ability to consume goods and services depends upon his/her income and wealth
An unequal distribution of income and wealth may result in an unsatisfactory allocation of resources
Income is measured by the flow of earnings of individuals or households.
Wealth is measured by the stock of financial assets e.g. houses owned by individuals or households.

4. Income and wealth There is a correlation between income and wealth
Wealth is a stock concept
Assets owned e.g. buildings, land, savings, shares
Human wealth e.g. skills and education
Income is a flow concept
Money generated from wealth e.g. wages, rent, interest
As income flows from the stock of assets a nation’s income and wealth are directly correlated

5. Factors influencing the distribution of income
The Government
Government policy redistributes income from richer to poorer members of society
A progressive tax will increase the proportion of tax as workers earn more, a regressive tax the opposite
The extent of this redistribution depends on the government of the day
The UK has a welfare system e.g. the National Health Service and Jobseeker’s Allowance that redistribute income to the less well off in society through welfare benefits
Will cutting interest rates increase inequality?

6. Factors influencing the distribution of income
Wealth
The accumulation of assets provides people with a stream of income in the future:
Shares provide capital growth, if the share price rises, and income growth through dividends
Property provides capital growth through house price appreciation and income growth through rent
The ownership of capital provides profit
Savings provide interest
There is a clear relationship between income and wealth

7. Factors influencing the distribution of income
Human capital
The skills, qualifications and experience of a worker based on their value to a firm
Skilled workers tend to be more wage inelastic and can bid up their wage price
Workers might increase their human capital by:
Attaining higher educational qualifications e.g. degree level or beyond
Training
Gaining experience in the workplace
Human capital leads to wage differentials between workers

8. Factors influencing the distribution of income
Wage differentials exist between workers
The demand for and supply of labour create differences in the wage rates of workers
High demand and low supply will mean that wages are inelastic and the wage rate is bid up
Low demand and high supply will mean that wages are elastic and the wage rate is bid down
For example, skilled workers will be able to earn higher rates of pay than unskilled workers and the distribution of income will be skewed in their favour
The distribution of income is influenced by a number of factors.
Wages, interest, rent and profit are the rewards to factors of production.
The owners of these factors of production are likely to receive more income than those that solely have labour to offer.
Draw a diagram to illustrate either bullet point 3 or 4.

9. Wage differentials Wage differentials due to the skills of the worker:
Skilled workers e.g. a top footballer or surgeon are limited in supply in comparison to unskilled workers
The MRP of skilled workers is greater than that of unskilled workers
Wage rate
Quantity of Labour DL
WRSkilled
QSkilled SL
Mario Balotelli: Liverpool agree £16m fee for AC Milan striker SL
WRUnskilled DL
QUnskilled

10. Saatchi exec: Women do want top jobs.
Wage differentials
Wage differentials between male and female workers:
The MRP of men tends to be greater than that of women:
Many women work in low skilled part-time jobs as they combine work with bringing up a family
This leads to women missing out on promotion whilst men are building their career
Some employers discriminate by deliberately overlooking female candidates of child-bearing age for positions
Saatchi exec: Women do want top jobs.

11. Wage differentials Wage differentials due to discrimination:
Disability
Gender
Race
Religion
Sexual orientation
These types of discrimination are illegal but often difficult to prove

12. Factors influencing the distribution of wealth
An increase in income will have a direct impact on wealth, providing the finance for investment
Investing in the productive capacity of the economy will increase the stock of physical assets, therefore increasing wealth
This will lead to economic growth and higher income in the future
In turn, this will allow us to further increase our stock of wealth
There is an opportunity cost between consumption today and consumption in the future
By investing in our stock of wealth by increasing productive capacity we can increase our future income

13. Factors influencing the distribution of wealth
Inheritance
Many people are born into wealth and are left wealth by relatives, particularly grandparents and parents
Income
As incomes rise people are more willing and able to acquire wealth e.g. property
Marriage
People often marry into wealth, commonly wedding those with similar levels of human capital or social standing

14. To what extent do you agree?

15. Equity and equality
Equity is the fair distribution of resources in society
It involves bias in the treatment of people dependent on their requirements
Equality is the equal distribution of resources in society
It involves giving the same amount of resources to all people regardless of their requirements
The notion of fairness is a difficult concept because it tends to be normative i.e. a value judgement.
Childcare subsidy for working parents to be increased
What is the government’s policy on childcare subsidies?
Should the focus be equity or equality?
A teacher is a scarce resource limited by the amount of time they have available.
Should teachers spend more time with lower performing GCSE students or should all students get the same amount of teacher time?

16. Different views on fairness affect policy
Policy prescriptions are the plans set out by economic agents in order to meet their objectives.
As equity is normative it means that people have different views on fairness
This affects policy prescriptions
A commonly held idea of fairness is that people should have an equal opportunity to succeed. This process approach argues that, as long as everyone faces the same rules, fairness is in operation
The results approach argues that we should all have the same at the end of the day e.g. everyone earns more or less the same pay
The need approach considers the requirements of each individual when allocating scarce resources e.g. those with health problems would receive a greater allocation of health resources
Therefore, policy prescriptions will be affected by the view of those in charge
Is it fair that Usain Bolt always wins the 100m?
Should we make him run further than other competitors?
Process approach or results approach – should we start off with the same or end up as the same?
Or should it be based on a needs approach?

17. Equality v equity
Equality is the extent to which people in society have the same income and wealth
This can be measured e.g. through the Lorenz Curve. Therefore, we are able to make positive statements based on the evidence
Inequality exists in all societies. Government looks to redistribute income and wealth through taxation and spending
The extent to which income and wealth is redistributed involves political decisions. Therefore, this involves normative statements and these views will influence policy prescriptions

18. Equality v equity
Equity is the concept of what is fair and just in society and therefore involves value judgements
This is normally achieved through the tax system:
Vertical equity suggests that those on higher incomes should pay more in tax, either progressively or proportionately. This is deemed to be morally correct as richer people have a greater ability to pay and are able to help poorer people in society. This will benefit society as a whole
Horizontal equity suggests that those people on the same income should pay the same tax. This is deemed to be morally correct as it does not discriminate against people on the grounds of sex, race etc.

19. 5 minute test – its only fair!
Distinguish between equity and equality.
What is meant by a normative statement?
Distinguish between horizontal and vertical equity.
End

20. Lorenz Curve and Gini Coefficient
The red 45° line shows perfect income equality in an economy.
At this point the bottom 20% of people earn 20% of income, the bottom 40% earn 40% of income and so on.
The green line shows the divergence from perfect income equality.
The Lorenz Curve shows the distribution of income or wealth within a country
100
% of income
% of population A B
100

21. Lorenz Curve and Gini Coefficient
0 population have 0% of the income. 100% of the population have 100% of the income.
The diagram shows that the bottom 20% of the population only has 3% of the income.
The top 20% of the population has 57% of the income. (100% - 43%).
The Lorenz Curve shows the distribution of income or wealth within a country
100
% of income
% of population
Income inequality in the UK. What would the Lorenz curve look like for the UK?
43% A B
Income inequality in the USA. What would the Lorenz curve look like for the USA? 3%
Bottom 20%
Top 20%
100

22. Lorenz Curve and Gini Coefficient
The Gini Coefficient is a figure between 0 and 1 that provides a numerical measure of the level of inequality in a country:
A/A+B
A is the area between the 45° line and the Lorenz Curve.
A+B shows all of the income within an economy.
The closer to 0 the more equal is the income distribution within an economy.
The Gini Coefficient measures the level of income or wealth inequality within a country
% of income
% of population
100 A B
100

23. Lorenz Curve and Gini Coefficient
The further away from the 45° line of perfect income equality we are the more unequal is society.
100
% of income
% of population
How would you rate equality in the UK?

24. Costs and benefits of more equal distribution
More equal distribution will lead to an alleviation of poverty as more people have enough income to live above the poverty line leading to a fairer society which is more inclusive
As people feel a part of society and have enough means for a decent standard of living less social problems are likely to occur leading to:
Less crime
A safer environment for all
Greater happiness
This will have to be paid for by the tax payer as higher earners see their income redistributed

25. Costs and benefits of more unequal distribution
More unequal distribution will lead to an alienation of poorer members of society and an increase in poverty and associated problems:
More crime
Social tension
Reduced happiness
Income will be redistributed back to higher earners with increased saving and wealth
There may be increased investment as the returns for entrepreneurs improve e.g. lower tax rates

26. Income and wealth in the UK
The Wealth Gap - Inequality in Numbers
Carry out some independent research into the distribution of household income and wealth in the UK
Produce an infographic to display your findings
Household incomes.
The Wealth Gap - Inequality in Numbers
Household incomes: how do you compare? Our guide explained
5 facts about economic inequality
What about inequality in the USA?

27. Inequality in the UK
Watch this video clip produced by the Centre for Economic Performance
At the times shown below stop the clip to answer the questions
Time
Question
0.02
Should we care about inequality?
0.19
How much do you think each of these earn in a year?
0.40
How much do you think each of these should be taking home in a year?
1.28
What do you think is the best way to measure inequality?
2.56
How would you redraw the chart to show actual inequality?
4.15
How do you think household wealth is shared?
6.18
Do you think the chances of a child born in the bottom quarter reaching the top quarter will have increased or decreased?
8.13