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Distribution of Income and Wealth HSC Notes

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Introduction

Measuring the Distribution of Income and Wealth Personal Income: the amount of funds, or other benefits measured in money terms that flow to individuals or households from the sale of factors of production over a period of time. Income inequality: refers to the degree to which income is unevenly distributed among people in the economy. Mean Income: the average level of income Median Income: the level of income that divides the income recipients into two halves. Lorenz Curve * The Lorenz Curve is constructed by plotting the cumulative percentage of total income received (y axis) against the cumulative percentage of income recipients (x axis). * If income were distributed evenly across the population, the LC would be a diagonal line through the origin of the graph, the LINE OF EQUALITY. The further the LC is away from this, the more unequal society's income distribution. Gini Coefficient * The Gini coefficient is a single stat that summarises the distribution of income across the population. * It is calculated as the ratio of the area between the Lorenz curve and the line of equality and the area under the line of equality * In the table above, it shows that in the late 1990s and early 2000s inequality increased, as the gini coefficient rose from 0.292 to 0.331 between 1996-97 and 2007-08. * A survey of the OECD countries ranked Australia 16th for its Gini coefficient Measuring the Distribution of Wealth * The table above shows that the top 20% own 61% of the wealth while the bottom 20% own almost nothing. * This means that 70% of households have less than the average level of household wealth i.e. $536,000 * Between 1915-1967 wealth inequality improved dramatically a corollary of urbanisation, declining significance of rural landholders * After this point, wealth inequality remained stable, the Gini coefficient remaining near 0.64 in 1986-98 which declined to 0.61 in 2006. ...read more.

Middle

While regional areas are earning 32.4% less than the state average. Economic Benefits of Inequality Income inequality can lead to increase in productive capacity of resources and thus an increase in real GDP per capita. Economic benefits are derived from incentive effects of inequality. Inequality encourages increased education and skills * If those with higher skills reap higher incomes, then new entrants and existing LF participants will be encouraged to improve education and skills. * Hence, this inequality encourages an increase in the quality of the labour force. Inequality encourages the force to work longer and harder * The potential to earn higher incomes is higher when people work for longer times and work harder. They will only be doing this, however, when they feel the extra income is more valuable than leisure. * If output is awarded by higher pay, then this will also lead to increased productivity. Inequality makes LF more mobile * Income can be used as an incentive to move where needed. * A mobile force leads to more efficient allocation of resources and therefore higher eco growth. Inequality encourages entrepreneurs to accept more risks * The prospect of greater income rewards is necessary to encourage entrepreneurs to take greater risks associated with business. Inequality creates potential for higher savings and capital formation * The higher the income an individual earns, the greater the proportion of income that will be saved and vice versa. * So, greater inequality should encourage increased savings in the economy because of the greater number of higher income earners. This should reduce reliance on foreign savings, providing domestic funds for investment. Economic Costs of Inequality Inequality reduced utility * Inequality reduces the utility or total satisfaction in society. This is because people on higher incomes gain less utility from an increase in income than people on lower incomes. This is from the principle of diminishing marginal utility: as more is consumed of a good it will provide progressively less utility. ...read more.

Conclusion

This improves the distribution of wealth in Australia. In 2006 the RBA calculated that without the superannuation, the wealth of the lowest quintiles would be 22% lower. The Indirect Impact of Government Policies * Impact of government policies aimed at creating a more equitable distribution of income can be outweighed by the consequences of other government policies that tend to widen the gap between higher and lower income earners * Monetary Policy ? slow down the rate of economic growth can influence the distribution of income and wealth. IR � results in a transfer of wealth from low income to high income earners, this is because most low income borrowers must pay higher interest rates. On the other hand, high income earners often have net savings so that high interest rates increase their income. This is an inadvertent side effect of a policy that is used to maintain a low inflation rate or moderate the pace of economic growth. * Microeconomic reform initiatives ? require restructuring that can create unemployment in the short term ? may result in the closure of some industries. * Privatisation of formerly government owned businesses ? followed by price increases and downsizing of workforce ? improve profits for shareholders. * Generally microeconomic reforms are used to improve efficiency and increase the returns on investments to owners of assets. Hence its benefits can tend to flow to wealthier asset owners, while its costs tend to be felt most by lower income earners. * One of the challenges for governments to undertake microeconomic reforms is to try to enforce them without increasing inequality. Governments often accompany microeconomic reforms with substantial adjustment packages to compensate the hardships faces by low income groups. * This was seen in 2000 when the GST was introduced ? welfare recipients also received a compensation package. * Lower income earners are expected to receive compensation for higher energy costs following the introduction of the planned emissions trading system that is scheduled to commence in 2011. ?? ?? ?? ?? Distribution of Income and Wealth Basil Razi ...read more.

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