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Understanding economic inequality
Understanding economic inequality

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3 Inequality in economics

In the previous section you learned that economists think of inequality in terms of monetary resources, that is in terms of income or wealth.

As you saw in Section 1, income is the flow that households receive from employment over a period of time, e.g. an hour, a month, a year. This includes full-time, part-time and self-employment. There will also be income accruing to owning assets, such as capital or land, which is broadly called capital income. For example, landlords receive income from renting property to tenants.

In contrast, wealth refers to the stock of assets held by an individual or household at any given point in time, and to the amount of debt owed. These assets come in various forms: from bank accounts, housing, cars, jewellery to corporate shares, stocks and bonds.

Activity 4 Income and wealth

Timing: Allow about 15 minutes

Look at the following examples. Decide which contribute to the flow of income and which contribute to the stock of wealth. Drag each answer so that they are in the correct position below.

Using the following two lists, match each numbered item with the correct letter.

  1. Dividends received from shares held in Tesco PLC.

  2. A worker gets paid for working overtime.

  3. The rent received from letting a flat to students.

  4. A teacher receives her monthly income.

  5. The government pays someone without work unemployment benefit.

  6. An increase in the value of shares owned in EasyJet PLC.

  7. Savings account

  8. The ownership of a 3-bedroom house which increases in value

  9. Inheritance

  10. Ownership of a valuable painting.

  • a.Income (flow over time)

  • b.Income (flow over time)

  • c.Wealth (stock at a given point of time)

  • d.Wealth (stock at a given point of time)

  • e.Income (flow over time)

  • f.Wealth (stock at a given point of time)

  • g.Income (flow over time)

  • h.Wealth (stock at a given point of time)

  • i.Income (flow over time)

  • j.Wealth (stock at a given point of time)

The correct answers are:
  • 1 = b
  • 2 = a
  • 3 = i
  • 4 = e
  • 5 = g
  • 6 = j
  • 7 = c
  • 8 = f
  • 9 = h
  • 10 = d

Income is earned from working and owning wealth. Based on the options above, name three ways in which a person can build up their stock of wealth.

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Answer

  1. Save some of their income, which can be held in a savings account.
  2. Increase in the value of the assets that they already hold. For example if house prices increase this will mean that owners of a three-bedroom house have increased wealth from homeownership.
  3. Inheritance or gifts from family members, for example a daughter receiving inheritance from her parents.

Income and wealth can affect one another. Higher income allows households to accumulate a greater stock of wealth through saving or buying assets. This higher level of wealth can then lead to a bigger income stream from assets and investments. At low levels of income households may incur debt (negative wealth) so that income is then reduced as households have to pay interest on loans.

In practice, data on income is more readily available than on wealth. Public bodies collect information on earnings for purposes such as tax. The nature of wealth means that it is more difficult to measure: a large part of wealth consists of the assets a household owns. The changing value of an asset is difficult to evaluate; asset prices might be rising but unless the asset is sold it is difficult to determine its actual value.

As a result of these difficulties in measuring wealth, the remainder of this course will focus on income inequality rather than wealth inequality.