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Chapter 8:. Distribution. Overview. Income Distribution & Wages and Salaries Income Inequality Interest Income, Savings, Rental Income & profit Circular Flow & Gross Domestic Product Causes of Income Inequality Government Programs to Reduce Poverty Who Is Poor?
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Chapter 8: Distribution
Overview • Income Distribution & Wages and Salaries • Income Inequality • Interest Income, Savings, Rental Income & profit • Circular Flow & Gross Domestic Product • Causes of Income Inequality • Government Programs to Reduce Poverty • Who Is Poor? • Regional Income Inequality
Income Distribution • Three basic economic questions are: “What to produce?” “ How to produce it?” & “For whom to produce?” • Supply and demand will answer this question in the productive resources market in the form of wages, rent, interest and profit.
Wages & Salaries • Increases in demand and decreases in supply cause wages to be higher whereas decreases in demand and increases in supply cause wages to be lower
Demand, Supply & Wages of Plumbers in a Canadian City (fig.8.2/8.3) p. 160 30 25 (wages per hour (dollars) 20 D2 Shortage 10 200 300 400 500 600 100 Number of Plumbers
A decrease in the demand for plumbers 30 Surplus 25 (wages per hour (dollars) 20 15 10 D2 200 300 400 500 600 100 Number of Plumbers
A Decrease in the Supply of Plumbers S2 30 25 20 (Wages per hour ($) 15 Shortage 10 200 300 400 500 600 100 Number of Plumbers
An increase in the Supply of Plumbers Surplus S2 30 25 20 (Wages per hour ($) 15 10 200 300 400 500 600 100 Number of Plumbers
Factors Affecting Wages & Salaries • Government regulations – minimum wage and fringe benefits • Labour unions • Large employers • Mobility of workers • Barriers to entry – specialized training, discrimination
Interest Income • Price paid to a lender for the use of a sum of money over a period of time
Savings • Part of income that is not spent on goods and services
Rental Income • Payment for the use of a resource, specifically land
Income from Profits • What is left over after all the costs have been paid for from the revenue earned by the business (i.e. Total Revenue – Total Costs) • Reward to the entrepreneur for taking the risk of starting a business • Prime motivator to start a business and run it well to satisfy the wants and needs of consumers
Circular Flow • Figure 8.5 p. 167
Gross Domestic Product (GDP) • The total value at market prices of all final goods and services produced in Canada over a period of time (usually a year) • Expenditure approach = Consumption + Investment + Government + (Exports – Imports) or C + I + G + (X - M) • Income approach = wages + rent + interest + profit – (depreciation + taxes
Income Inequality • Lorenz Curve is a graph that helps illustrate the income inequality in a society by contrasting perfect equality with reality within a given economy
Natural ability Education, training and opportunity Property ownership Ability to influence wages and salaries – labour unions and professional associations Discrimination – women and minorities Poor health or physical disability Region or residence – Ontario higher incomes than Newfoundland Luck – lottery, accident Weeks worked Age Causes of Income Inequality
Government Programs to Reduce Poverty • Investment in human capital (i.e. education and skill training) • Keep economy operating at a high level to provide jobs • Safety programs to protect workers and universal health care • Old age security pension, unemployment insurance, welfare, C.A.P.
Who is Poor? • $15, 067 (in 1992) for a family of four in a mid-sized Canadian city according to Professor Sarlo • House of Commons Conservative sub-committee menu of basic needs with differences in cost of living from location to location taken into consideration • Statistics Canada Low Income Cut-Off (L.I.C.O.) spend 70% or more on three essentials (food, clothing, shelter) • 12% of families and 30% of unattached individuals below the L.I.C.O. line
Regional Income Inequality • Ontario, Alberta and British Columbia wealthier • Maritimes and Quebec poorer