Wealth, income and inequality

What does it mean to be wealthy? The answer to this question varies from culture to culture. In the modernised, industrial world that we live in, wealth generally means all the collected store of valuable things that belong to a person (or family, company or country). Wealth can include money saved in bank accounts, or invested in pension schemes. It can include land, houses or other property and valuable belongings such as works of art or precious jewels. Many people also own stocks and shares in companies. The various things that make up a person's wealth are often called assets.

So wealth is a static thing. The term income, on the other hand, suggests a flow of money. Income is the amount of money that a person (or family or company) receives over a period of time. For most people, this means the salary they get for the work they do. However, there are other sources of income. One source is government benefits, such as unemployment benefit or family support. Another source is rent from property and another is interest from savings.

Huge inequalities in wealth owned by individuals exist in many countries. Take the United Kingdom for example. A fifth of all the marketable wealth is owned by just one per cent of the UK's population. That one per cent own over £355 billion of assets. Figure 1 on page 56 shows how the rest of the United Kingdom's wealth is distributed. As you can see, the richest 50 per cent of the population own over 93 per cent of the wealth. In other words, half the population own nearly all the wealth and the other half own only a tiny percentage. The chart also shows that the richest one per cent of the population own over a fifth of all the country's wealth.

Large inequalities also exist in the distribution of income. The extent of these inequalities can be shown with something called the Lorenz curve. You can see an example in figure 2 below. The straight blue line shows perfectly equal distribution of income. For example, the bottom 20 per cent earn 20 per cent of the total income. The bottom 40 per cent earn 40 per cent and so on. This is the ideal situation. The red curve, however, shows the real situation for the United Kingdom. You can see immediately how far from perfect the distribution is. Half of the population, for example, earn just under a third of the total income. Move horizontally along the population line and you can see that 90 per cent of the population take only 70 per cent of the total income. This means that the top ten per cent of the population earn nearly 30 per cent of the country's total income.

Poverty

Without a doubt poverty is a huge problem in the world today. Figures suggest that three billion people or half the world's population live in poverty. However, although we associate poverty with developing countries, poverty of some kind also exists in industrialised nations. For example, it is now thought that quite possibly one in every ten Americans lives in poverty. However, poverty means different things to different people. How do economists define poverty?

One measure of poverty is absolute poverty. People live in absolute poverty when they live on or below the poverty line. This is a level of income that is so low that people cannot afford the basic necessities to live, such as food, clothing and shelter. According to the World Bank, these are people who are living on two dollars a day.

However, there are one billion people in the world who live on less than one dollar a day. The World Bank defines this as extreme poverty.

Few people in industrialised countries live in absolute poverty, but many live in relative poverty. This measure of poverty takes into account the differences that exist in a population between the rich and the poor. For example, some economists say that people who earn less than half the average income live in relative poverty. In Britain, this means 14 million people.

Why does poverty still exist? There is no single answer to this question. In developing countries, causes of absolute poverty include natural disasters like droughts and floods, political corruption and war. However, in many cases people - and whole populations - are caught in a trap: the poverty trap.

People on a low income spend everything they have on daily necessities. They save almost nothing. In order to raise themselves out of poverty, they need education. This costs money. Even when governments provide free schooling, the poor may not send their children because they need them to work. These families cannot afford the cost of sending a child to school. Without education, the children cannot find better paid work. In this way, generations of the same family remain poor.

The same cycle that traps individuals can trap a whole population. Economic growth depends on investment. Investment money comes from savings. A nation that has almost no savings cannot grow economically. This keeps wages low, so again people cannot save and the cycle continues.

Macroeconomics

In the 1930s one of the world's strongest economies suffered a devastating collapse. It was the American economy, and the disaster was the Great Depression. The effects of the Great Depression were felt all around the world, and it brought about a change in economic thinking. Economists began to realise that looking at the behaviour of individual consumers and suppliers in the economy was not enough. Economists and governments had to understand how the whole economy worked. In other words, they had to have an understanding of macroeconomics.

Microeconomics looks at how the details of the economy work. Macroeconomics takes a few steps back and looks at the whole picture. While microeconomics looks at supply and demand for a single product or industry, macroeconomics follows supply and demand patterns for the whole economy. Whereas microeconomics is about economic events at home, macroeconomics looks at how the domestic economy interacts with the economics of other countries.

However, macroeconomics isn't only about knowing what's happening in the economy. After the shock of the Great Depression, governments realised that an economy needs to be managed. Most governments aim to have steady economic growth, to control inflation and to avoid recessions. Just managing an individual business is a hard enough task. How do you manage a whole economy? Governments have certain mechanisms which help them to do this.

The first of these mechanisms is fiscal policy. Fiscal policy refers to the tax system and to government spending. By increasing or decreasing the amount of tax people must pay, the government can affect how much money people have available to spend (disposable income). This, in turn, has an effect on demand in the market. By increasing or decreasing their own spending, governments can have a huge effect on the growth of the economy.

The second mechanism is monetary policy. With its monetary policy, a government sets interest rates and also controls the amount of money that circulates in the economy. The interest rate the government sets influences the rate that commercial banks set when they lend money to customers. Interest rates have a big impact on the economy. For example, they can affect people's decisions about saving or spending money.

The third mechanism is administrative approach. This is a range of things that governments do to increase the supply of goods and services to the economy but without increasing prices. There are a number of ways governments try to do this. For example, improvements in education and training can make the workforce more productive. Investment in technology can make industry more efficient. Governments can also change employment and business laws to make the market more competitive.

With a combination of these methods, governments try to steer or guide the economy on a steady and predictable path. They aim for gradual economic growth and to avoid disasters like the Great Depression.

Date: 2015-12-24; view: 2803