Friday, 27 May 2011

Question on Inequality

This is an economics exam question I tries - thought it was quite difficult actually - I didn't do it in exam conditions just thought you might like to see.

Examine the causes of income and wealth inequality in the UK or any country of your  choice (20)

The country of my choice I wish to discuss in this answer is China. 
Income is the money received for work or investment whereas wealth is the stock of assets such as cars that a person owns. The differentiation is important when trying to suggest the reasons for inequalities of wealth and income.
One of the main reasons why income inequality exists in China is because there is no legal minimum wage. Employers are allowed to pay their employees as little as they please, cutting costs, which ultimately gives them a larger income. Employees get and smaller pay and employers get a larger one and this pushes the gap between the rich and the poor.
However, the lack of a legal minimum wage cuts costs for businesses thus allowing them to employ more people. Inequality is likely to be less than if some employees were given a high pay and most were unemployed. Particularly as China does not give any state support like the UK does.
Nevertheless, the low wages restrict how much people can spend. China is booming country where demand for large ticket items such as houses and cars is large and this pushes up the price of such assets. Many individuals on low salaries (particularly as no minimum wage exists) cannot afford assets such as houses and this causes wealth inequalities. The rich are able to buy houses not just for themselves but for investment reasons (as demand is high) pushing up house prices future and enlarging the wealth gap between the rich and the poor.
However, this is based on the assumption that houses prices are rising extremely fast and in real terms for if they are not then many would not invest in them pushing up prices of houses further and creating wealth inequalities between the rich and the poor. It depends on all other things being equal (ceteris paribus) such as steady inflation and incomes. If incomes rise every year inline with house price then this does not seem like a probable reason for inequalities between rich and poor.
Another cause for inequalities between rich and poor is the healthcare system. In China, the new healthcare reform means that people need to pay in part for healthcare services. This provides an incentive for the poor to save (in case of a rainy day) out of what money they have which makes it even more difficult for them to invest in assets such as cars and houses. The rich of the other hand have to pay the same costs as the poor for healthcare and the government pays in part of their healthcare too which furthers wealth inequalities between the rich and the poor. 
However, it depends on the magnitude of what they have to pay. If the government covers most of the costs anyway then this won’t have a significant impact on wealth inequalities as people are likely to save less for a rainy day and save more to buy assets such as houses and cars.

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