5 - Distribution of income and wealth.docx

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HSC Economics, Topic 3: Economic Issues, Part Five Distribution of income and wealth Key concepts in the distribution of income and wealth  Personal income o 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  Reward to the owners of the FoP for owning, maintaining, managing productive R o Forms
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  HSC Economics, Topic 3: Economic Issues, Part Five Distribution of income and wealth Key concepts in the distribution of income and wealth    Personal income o   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    Reward to the owners of the FoP for owning, maintaining, managing productive R o   Forms    Wages from labour, rent from land, interest from capital, profit from enterprise    Social welfare from government    Income inequality o   The degree to which income is unevenly distributed among people in the economy o   Distinguished by the amount of personal income earned by each individuals    Low level of inequality; people receive a similar share of Y    High level of inequality; people receive highly varying shares of Y    Personal wealth o   The net value of real and financial assets owned by an individual at a particular point in time    Real assets include consumer durables, property    Financial assets include shares, bonds, cash o   Calculation: personal wealth = assets  –  liabilities    Wealth inequality o   The degree to which wealth is unevenly distributed among people Measurement  –  Lorenz curve and Gini coefficient Measuring the distribution of income    Y inequality may be measured by the degree of variance in the total share of Y earned by different quintiles of equalised disposable household income o   High degree of variance, high degree of inequality o   Low degree of variance, low degree of inequality    Key observations from data o   In 2005-06;    Poorest 20% of population received 8% of the total income    Richest 20% of population received 39% of the total income    Key concepts necessary to interpret data o   Mean income    The average level of income    Calculated by dividing the total income of a group by the number of income recipients in that group o   Median income    The level of income which divides the income recipients in a group into two halves    The Lorenz curve o   A graphical representation of income distribution, plotting the cumulative increase in population against the cumulative increase in income o   X-axis: cumulative proportion of income units, Y-axis: cumulative proportion of total income o   Begins at 0 as 0% of families earn 0% of income o   Ends at 100 as 100% of families earn 100% of income o   Line of perfect equality is a diagonal line    Bottom 20% account for 20% of total income, bottom 40% account for 40% of total income, bottom 60% account for 60% of total income, etc.     The Lorenz curve lies below the line of perfect equality    There is a degree of inequality in Y distribution    The greater the distance bw Lorenz curve, line of perfect equality, the greater the inequality in Y distribution    Decrease in degree of inequality; Lorenz curve shifts inward towards line of perfect equality    Increase in degree of inequality; Lorenz curve shifts outward away from line of perfect equality    The Gini coefficient o   A mathematical expression of the degree of Y inequality o   Calculation of Gini coefficient    It is calculated as the ratio of area A to (Area A + Area B)    Gini coefficient = Area A/(Area A + Area B)    Where area A = area bw Lorenz curve, line of perfect equality    Where area B = total area under line of equality o   Gini coefficient ranges from 0 to 1    At perfect equality; Gini coefficient is 0 = 0/0 + 0    All incomes are equal    At perfect inequality; Gini coefficient is 1 = 1/1 + 0    1 individual owns 100% of total income o   The smaller the Gini coefficient, the greater the level of equality    Decreasing GC, increasing equality o   The greater the Gini coefficient, the smaller the level of equality    Increasing GC, decreasing equality Measuring the distribution of wealth    Wealth inequality may be measured by the degree of variance in the total share of wealth owned by different quintiles of net household wealth o   High degree of variance, high degree of inequality o   Low degree of variance, low degree of inequality    Key observations from data o   In 2006;    Poorest 20% of population received 1% of the total wealth    Richest 20% of population received 61% of the total wealth Trends in the distribution of income    Nature of data collected o   Inequality in distribution of Y is measured by ABS    Published in ‘ Survey of Income and Housing ’    o   Population split into quintiles pertaining to equivalised disposable household incomes    20% portions of population    First quintile (20%) have lowest equivalised disposable household incomes    Second quintile (20%) have second lowest equivalised disposable household incomes    Third quintile (20%) have middle equivalised disposable household incomes    Fourth quintile (20%) have second highest equivalised disposable household incomes    Fifth quintile (20%) have highest equivalised disposable household incomes    Analysis of data collected o   Percentage income share for income quintiles, Gini coefficient (1997-2006) o   Key observations pertaining to quintiles    In 2005-06    First quintile received 7.9% of total equivalised disposable household Y    Middle three quintiles relieved 53.7% of total equivalised disposable household Y    Fifth quintile received 38.5% of total equivalised disposable household Y    Between 1997-98, 2005-06    Fall in share of total Y by; o   First quintile; 0.1% fall o   Third quintile; 0.1% fall o   Fourth quintile; 0.6%    Rise in share of total Y by; o   Second quintile; 0.1% o   Fifth quintile; 0.6% o   Key observations pertaining to Gini coefficient    In 1997-98: Gini coefficient at 0.303    In 2000-01: Gini coefficient at 0.311 (peak)    in 2005-06: Gini coefficient at 0.307    Bw 1997-98, 2005-06    Reduction to income inequality by 1.3% o   Due to: introduction of new welfare payments for families, carers; modest income tax cuts in 2004-05 federal budget    Median and mean equivalised disposable household incomes o   Distribution of income is asymmetric    A relatively small number of people have relatively very large household incomes    A large number of people have relatively lower household incomes o   Key observations in median equivalised disposable household incomes    In 2005-06; >$550 per week for all persons o   Key observations in mean equivalised disposable household incomes    In 2005-06; >$600 per week for all persons    In 2003-04l >$550 per week for all persons    In 1994-95; >$450 per week for all persons    Bw 1994-95, 2005-06    31% growth of mean incomes for low-income earners    32% growth of mean incomes for middle-income earners    36% growth of mean incomes for high-income earners Trends in the distribution of wealth    Nature of data collected o   Inequality in distribution of wealth is measured by ABS    Published in ‘ Household Wealth and Wealth Distribution 2005-06 ’    o   Wealth is measured as net worth    Net worth = value of liabilities - value of assets    Liabilities may include loans, mortgages, credit card debts    Assets may include houses, shares, cars, businesses o   Distribution of wealth is more unequal than distribution of income o   Population split into quintiles pertaining to household net worth    20% portions of population    First quintile (20%) have lowest household net worth    Second quintile (20%) have second lowest household net worth    Third quintile (20%) have middle household net worth    Fourth quintile (20%) have second highest household net worth    Fifth quintile (20%) have highest household net worth    Analysis of data collected o   Shares of household net worth and income (2005-06) o   Key observations pertaining to quintiles    In 2005-06    First quintile accounted for 1% of total household net worth    Middle three quintiles accounted for 37/8% of total household net worth    Fifth quintile accounted for 61.1% of total household net worth    Median and mean household net worth o   Distribution of wealth is asymmetric    A relatively small proportion of households had relatively high net worth    A large number of households had relatively low net worth o   Key observations in mean household net worth    In 2005-06    Mean value of household assets; >$650,000    Mean value of household liabilities; >$90,000 o   Mean net household net worth; >$550,000 o   Key observations in median household net worth    In 2005-06    Median net household worth; >$300,000    Additional notes o   Bw 1915, 1967 wealth inequality improved significantly    Due to urbanisation, industrialisation, development of middle class o   Bw 1967, 1986 wealth inequality has remained relatively stable    Eg Gini coefficient remained near 0.64 bw 1986, 1998    This improved to 0.61 in 2006 largely due to growth of superannuation Sources of income as a percentage of household income Source of income    Main sources of household income o   Wages and salaries    This accounted for 56% of total gross income (2006-07)    Return to labour    Form: wage or salary payment for sale/use of labour, non-wage benefits (eg fringe benefits, employer contributions to superannuation, workers’ compensation p ayments) o   Rent    This accounted for 12% of total gross income (2006-07)    Return to land    Form: rent, dividends, interest from sale/use of land o   Gross operating surplus
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