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--3.3.1 INCOME AS A 'FLOW' & WEALTH AS A 'STOCK'--
--3.3.1 INCOME AS A 'FLOW' & WEALTH AS A 'STOCK'--
--WHAT IS INCOME?--
"INCOME refers to the flow of money received by an individual or household over a period of time, usually from providing factors of production or receiving transfer payments."
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--TASK--
"What income-earning factors of production do you actually own? Can you link it to why you are actually sitting in this classroom now?"
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"That's right, you own your own labour, and as you know, the reward for providing this factor is called 'wages', and ultimately your wage is heavily linked to your level of education, hence why you are here."
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--WHAT IS WEALTH?--
"WEALTH refers to the total net monetary value of the ASSETS owned by an individual or household at a particular point in time, after deducting any outstanding LIABILITIES (debts). It is often called your 'NET-WORTH'.
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NET WORTH = ASSETS - LIABILITIES
= '$-value of what you own' - '$-value of what you owe'
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"Whenever we talk about the 'richest' people in the world, we are usually measuring their net assets."
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--TASK--
"What NET ASSETS do you actually own? Can you put a $-value on it?"
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"That's right, you own your own labour, and as you know, the reward for providing this factor is called 'wages', and ultimately your wage is heavily linked to your level of education, hence why you are here."
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The water entering the bathtub represents a flow of income, while the water already accumulated represents the stock of wealth. Spending and other outflows can reduce the accumulated stock.
4. What is the relationship between income and wealth?
Income and wealth are closely related, but they are not the same thing.
- Income can increase wealth: When an individual saves part of their income, they can accumulate financial assets, increasing their stock of wealth.
- Wealth can generate income: Owning assets such as rental properties, shares or bonds can generate rent, dividends and interest.
- Wealth can increase without additional income: An increase in the market value of a property can increase an individual's wealth through capital gains, even if their income remains unchanged.
- High income does not necessarily mean high wealth: Someone earning a high salary but spending most of it and holding substantial debts may have relatively little net wealth.
- High wealth does not necessarily mean high income: A retired individual may own a valuable mortgage-free property but receive a relatively small monthly pension.
5. Why is the distinction important when studying inequality?
INCOME INEQUALITY refers to the unequal distribution of income between individuals or households over a period of time.
WEALTH INEQUALITY refers to the unequal distribution of net wealth between individuals or households at a particular point in time.
Wealth inequality is often greater than income inequality because wealth can accumulate over many years through saving, inheritance and increases in asset values. Furthermore, individuals who already own substantial wealth may earn additional income from their assets, allowing them to accumulate even more wealth.
Consequently, income inequality and wealth inequality can reinforce one another over time.
--3.3.2 MEASURING INEQUALITY--
--3.3.2 MEASURING INEQUALITY--
--TASK--
"Look at the diagram below and find the % of wealth held by the richest 1% of the population in South Africa, then switch to the richest 10%." "Do you think this is fair?" "What about your country?"
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"Let's switch our focus to income and look at the 'income share of the richest 10%'."
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"This data is frequently used to make headlines like."
"In the headline, it mentions that the '..top 10% of income earners earn more than the other 90%', which means the richest income decile (the richest 10% of households in the world) receives more than 50% of total global income."
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"Graphically, if we start at the top 10% of income earners, earning the same as the other 90%', it looks like this in deciles."
"These tables are great, but there is an even more visual form of income inequality that this data can create called a Lorenz curve."
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--TASK--
"Using the decile data above, we build the curve as follows." "What do you notice about the curves' 'DISTANCE' from the line of perfect equality and the level of inequality?"
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"That's right! The further the Lorenz curve lies below the line of perfect equality, the greater the degree of income inequality, and vice versa.
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--TASK--
"Switch between the curves." "What do you notice about the AREA between the Lorenz curve and the line of perfect equality and the TOTAL AREA underneath the line of perfect equality, as income becomes more unequal and vice versa?"
"That's right; as income inequality increases, the area between the Lorenz curve and the line of perfect equality ('A') gets bigger, whilst the total area below the line of equality ('B') remains the same and vice versa."
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--TASK--
"Can you think why this could be useful when you want to compare inequality changes over many years or between many countries?" (Hint: "Imagine you wanted to compare inequality changes in US over the past decade using a Lorenz curve diagram.")
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"That's right; it would look so stacked, and slight changes would be undistinguishable;
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"Therefore, if we measure area 'A' as a proportion of area 'B' we could convert the information contained in the Lorenz curve into a single number between 0 and 1, making it much easier to compare."
This is exactly what the GINI COEFFICIENT does!
0 = PERFECT EQUALITY: Everyone receives exactly the same income.
1 = PERFECT INEQUALITY: One individual receives all the income, while everyone else receives nothing.
The closer the Gini coefficient is to 1, the greater the degree of income inequality, and vice versa."
- Explain income and wealth distribution.
- Distinguish equality from inequality and absolute from relative poverty as useful supporting concepts.
- Interpret a Lorenz curve, with cumulative population ranked from poorest to richest on the horizontal axis and cumulative income or wealth on the vertical axis.
- Explain the 45-degree line of perfect equality.
- Explain why a more bowed Lorenz curve indicates greater inequality.
- Interpret a Gini coefficient between 0 and 1, where 0 represents perfect equality and 1 represents maximum inequality.
- Compare inequality between countries or across time.
Important: Cambridge explicitly states that Gini coefficient calculation is not required. Students should understand the relationship between the area separating the Lorenz curve from the equality line and the Gini coefficient, but they do not need to calculate the area or coefficient.
I would teach students to draw and interpret a Lorenz curve even though the syllabus does not separately
--3.3.3 REASONS FOR INEQUALITY--
--3.3.3 REASONS FOR INEQUALITY--
--3.3.4 POLICIES TO REDISTRIBUTE INCOME & WEALTH--
--3.3.4 POLICIES TO REDISTRIBUTE INCOME & WEALTH--
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