Category: Economics for Business: Ch 18

During the period that Mrs Thatcher was in office, the post-war trend towards greater equality of income was reversed. Although some of the changes the Labour government has made since 1997 have helped those on lower incomes, the rise in incomes at the top of the scale has meant that the gap between rich and poor has widened again. The article below from the Guardian looks at the latest figures on income inequality.

Inequality at same level as under Thatcher Guardian (18/5/07)


Questions
1. Define the terms (a) Lorenz curve and (b) Gini coefficient.
2. Given the changes in income distribution outlined in the article, discuss how the value of the Gini coefficient has changed since 1997.
3. Draw Lorenz curves to show the changes that have taken place in income distribution during Mrs Thatcher’s period in office and during Tony Blair’s time in office.
4. Analyse two policies that the government could introduce to reverse these income distribution trends.

The national minimum wage will rise again in October 2007 by about 3% from £5.35 to £5.52. However, the Work Foundation has warned that the effectiveness of the minimum wage may be at its limits and that further rises in its level may not have the desired impact in terms of addressing inequality. The articles and press release below consider these issues.

Minimum wage up to £5.52 per year BBC News Online (7/3/07)
National minimum wage at the limits of its effectiveness The Work Foundation – press release (6/3/07)
Warning over minimum wage level BBC News Online (6/3/07)

Questions

1. Using diagrams as appropriate, illustrate the likely impact on the UK labour market of the proposed increase in the national minimum wage from October 2007.
2. Assess the arguments given by the Work Foundation that the minimum wage is reaching the limits of its effectiveness.
3. Evaluate two methods other than a national minimum wage for reducing levels of both relative and absolute poverty.

As part of its Target 2.0 competition for students, The Times published a series of briefings looking at the factors that cause inflation. The one linked below considers the role of labour markets in determining inflation.

Interplay of work and inflation rate Times Online (2/2/07)

Questions

1. Explain the key determinants of the equilibrium level of wages in the labour market.
2. Assess the role of equilibrium labour market wages in the determination of the level of inflation.
3. Discuss the extent to which the NAIRU is still a relevant theory when considering the determinants of inflation.

In the Guardian article linked to below, Ashley Seager argues that the only way to reduce the extent of social exclusion is to tax the main asset of a large proportion of the population; their house. He argues that the massive increases in land values that have taken place with rising house prices have increased divisions in society and that a land tax is required to address this. It may be interesting to consider this issue along with News Item 4 about global wealth distribution.

A land tax is 200 years overdue Guardian (8/1/07)

Questions

1. Explain what is meant by a land tax and suggest different ways that this could be levied.
2. Discuss the likely impact of a land tax, as proposed by Ashley Seager, on the major economic targets.
3. Analyse possible alternative policies to reduce the levels of exclusion in UK society.

A United Nations report on wealth distribution has found that the world’s richest 1% own 40% of the world’s wealth. Europe, the US and some Asia Pacific countries account for most of the world’s wealthiest with 30% of them living in the US. So is this a problem and should we, or indeed can we, do anything about this. The article below from the Guardian looks at these issues in more detail.

World’s richest 1% own 40% of all wealth, UN report discovers Guardian (6/12/06)

Questions

1. Examine whether the fact that the richest 10% in the world own 85% of all world assets is likely to cause problems for developing countries.
2. Suggest two policies that a developed country could use to narrow wealth distribution and evaluate the likely impact of these policies on the level of economic growth.
3. “”In some ways, wealth is more important to people in poorer countries than in richer countries.” Discuss the extent to which this assertion from the article is likely to be true.