Why is income and wealth shared unequally, and what can be done about it?
The difference between income and wealth, the meaning of a fair distribution, the causes of inequality and poverty, and how government can redistribute.
An OCR J205 answer on the distribution of income and wealth: the difference between the two, the causes of inequality and poverty, and how governments redistribute through tax and benefits.
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What this dot point is asking
OCR wants you to distinguish income from wealth, explain what a fair distribution means, identify the causes of inequality and poverty, and explain how government can redistribute. A fair distribution of income and wealth is one of the four macroeconomic objectives.
Income versus wealth
The two are linked: a high income lets a person build wealth (by saving and buying assets), and wealth can generate income (rent from property, interest on savings). Wealth is usually distributed even more unequally than income.
What a fair distribution means
A "fair" distribution does not mean everyone has the same. Most economists mean reducing extreme inequality and poverty so that everyone has a reasonable standard of living and opportunity. There is genuine debate about how equal a society should be, balancing fairness against the incentives that some inequality provides.
Causes of inequality
Income and wealth are shared unequally for several reasons:
- Differences in wages. Skills, qualifications and the demand for and supply of different types of labour create large wage gaps.
- Ownership of assets. Those who own property, businesses or shares earn extra income and build wealth; those who do not, cannot.
- Education and opportunity. Better education leads to higher-paying jobs, and advantages can pass between generations.
- Inheritance. Wealth passed down concentrates assets in some families.
- Unemployment and ill health. Being out of work or unable to work lowers income.
How government redistributes
Governments use several tools to reduce inequality and poverty:
- Progressive taxation. Higher earners pay a higher percentage of income in tax, so the tax system narrows the gap.
- Benefits and tax credits. Payments to those on low incomes, unemployed, disabled or retired raise their income.
- National Minimum Wage / National Living Wage. A legal pay floor lifts the lowest wages.
- Public services. Free or subsidised education and healthcare benefit poorer households most, improving opportunity.
Try this
Q1. State the difference between income and wealth. [2 marks]
- Cue. Income is a flow of money over time (such as wages); wealth is a stock of assets owned (such as a house).
Q2. Explain one way a government can reduce income inequality. [3 marks]
- Cue. A progressive income tax takes a higher percentage from higher earners, narrowing the gap and funding benefits for lower earners.
Exam-style practice questions
Practice questions written in the style of OCR exam questions on this dot point, with worked answer explainers. The year tag is the paper they imitate, not the source.
OCR J205/02 20194 marksExplain the difference between income and wealth, using an example of each.Show worked answer →
A 4 mark Explain question testing a precise distinction.
Income is a flow of money received over a period, such as wages, interest or benefits (for example a month in pay). Wealth is a stock of assets owned at a point in time, such as a house, savings or shares (for example a home).
Markers reward the flow versus stock contrast and a valid example of each. The key idea is that income is earned over time while wealth is accumulated and held.
OCR J205/02 20226 marksDiscuss how a government could reduce income inequality, and a possible drawback of doing so.Show worked answer →
A 6 mark evaluative question.
Methods: a progressive income tax (higher earners pay a higher percentage), benefits and tax credits for lower earners, a National Minimum Wage, and spending on education and healthcare that helps poorer households most.
Drawback: high taxes on high earners and generous benefits may weaken incentives to work, save or take risks, and could encourage some high earners or firms to leave, slowing growth. Markers reward at least two redistribution methods and a reasoned drawback, with a judgement on the balance between fairness and incentives.
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Sources & how we know this
- OCR GCSE (9-1) Economics J205 specification — OCR (2017)