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Distribution of Wealth

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Distribution of Wealth

You surely know about the world’s wealthy people, but how do you define wealth? Is it the income you receive at the end of the month? How would you answer if someone asked you how wealthy you are? This explanation will clarify what the distribution of wealth in economics is and how to differentiate it from other economic concepts like income.

Distribution of wealth in economics

In economics, wealth is the aggregate of all assets of a firm, household, or government that generates income for the future.

Wealth denotes the current market value of the total assets that a firm, household, or government own at a given time.

Wealth includes human capital and natural resources rather than money and securities. Wealth can be created in different ways:

  • Savings in bank deposits.
  • Ownership of shares issued by listed companies and equity stakes in private companies.
  • Ownership of property.
  • Wealth in bonds.
  • Funds in occupational pension schemes and life insurance policies.

Wealth distribution is a comparison of wealth among various people of a particular community. This metric examines the economic distribution of ownership in a community rather than its income. Assets minus liabilities equals net worth or wealth.

Basis of comparison

Income

Wealth

Meaning

Income refers to money received periodically in exchange for products or services provided or the capital invested.

Wealth implies the assets and properties owned by a person during his course of life.

What is it?

It is the flow of money obtained by various factors of production.

It is the market price of the stock or asset owned by an individual or household.

Acquisition

Generated immediately over a limited time.

Accumulated over a period of time.

Tax levied

Income tax

Wealth tax

Table 1. Key differences between income and wealth.

Types of wealth

Net property wealth, net financial wealth, physical wealth, and private pension wealth all contribute to total wealth.

  • Property wealth is any privately held property in the United Kingdom or elsewhere.

  • Physical wealth is the value of a household's physical goods, such as antiques, artwork, automobiles, and customised license plates.

  • Financial wealth is measured by subtracting the value of any financial liabilities from the value of financial assets.

  • Private pension wealth is the value of private pension plans from which individuals can draw an income now or in the future. The greatest component of total wealth was private pension money.

Factors that influence the distribution of wealth

The factors that influence the distribution of wealth are primarily linked to the income individuals generate. That is because the higher the income a person generates, the higher their savings are. The main factors influencing the distribution of wealth include capital gains benefit, private pension assets, inheritance, and the difference in tax between income and wealth.

Capital gains benefit

Capital gains are the value a person receives from property prices or stocks they’ve invested in. Property and real estate usually gain value over time, enabling an individual to gain more wealth.

However, when you have more people who own durable goods such as TV, cars, or more people paying rent, this will influence the distribution of wealth in society. The reason for that is that unlike assets like real estate, durable goods lose value with time. This means that an individual’s wealth is depreciating.

Private pension assets

Usually, private pension assets outperform the pension funds government distributes to individuals. The more people invest in private pension assets, the more wealth they will generate, which in turn influences the distribution of wealth. However, when workers rely solely on a government pension, the distribution of wealth will be more unequal.

Inheritance

The total amount of assets that one inherits plays an influencing factor when it comes to wealth distribution. Individuals who have inherited their wealth and continued to build upon it, like the Rothschild Family, are known as people with ‘old wealth,’ whereas individuals who have built their wealth from the beginning, such as Bill Gates, are known as ‘new wealth’.

Both new wealth and old wealth can significantly influence the distribution of income. Usually, when you have a huge amount of inherited wealth, the wealth will remain concentrated in a family and not flow to other members of society.

The difference in tax between wealth and income

The taxation difference between wealth and income plays an important role in the distribution of wealth. Usually, when income is taxed more, it will cause an unequal distribution of wealth. That is because a part of an individual’s income will be consumed by tax, which will lower their ability to invest in assets that generate wealth.

The UK tax for income is higher than it is for wealth.

Wealth distribution in the UK: the reasons for wealth inequality

During the Covid-19 Pandemic, Britain's wealth gap widened, with the richest 10% of the population receiving an average of £50,000, dwarfing advances for the lowest third of the population according to Resolution Foundation.

Wealth surged during the lockdown as a consequence of a lack of spending possibilities and growing property values, but the gains were skewed to the affluent by a ratio of more than 500 to 1.

The UK has a lot of money, but it's distributed very unequally. Over the last three decades, total net household wealth as a percentage of national income has doubled. Understanding the scale and form of wealth in the United Kingdom is critical for policymakers, and it provides context for the growing interest in wealth taxes in the country.

The reasons for wealth inequality in the UK include:

  1. Pension inability: in recent years, wealthier households have invested more of their income in private-sector pensions, which are known to outperform the UK government pensions. For the wealthiest 30% of families, private pension money contributes the most to their overall wealth1. This has contributed to a rise in wealth inequality in the country as most people can’t contribute to private pension funds.
  2. Property prices: since the 1960s, property prices in the United Kingdom have risen at a significantly higher rate than inflation. Rising property prices have resulted in a significant increase in household wealth for property owners. The divide between property owners and non-property owners has grown as a result of this. This has been worked by the rise in second houses and buy-to-let properties, which allow families to build a property portfolio.
  3. Savings ability: low-income people rarely have the ability to save. They have a high marginal proclivity for consumption. People with greater salaries have a reduced marginal propensity to consume in comparison, and they have the opportunity to save (for example, in private pensions and personal savings accounts) after their purchasing needs.
  4. Increased income disparity: according to an OECD report, the UK has been experiencing an increase in income inequality. This has also contributed to the rise in wealth inequality, as those individuals whose income has decreased were also less able to save2.
  5. Capital returns: in his book Capital in the Twenty-First Century, Thomas Piketty argues that the rate of return on capital (property, asset investment) has continuously outperformed the rate of return on economic growth3. This indicates that wealth returns are higher than actual income growth. This leads to a rise in wealth disparity, which he observes has been a hallmark of the developed world for the previous 20 years.

Distribution of wealth in the world: some examples

The world’s richest 1%, individuals with more than $1 million, possess 43.4% of the world’s wealth, according to the Credit Suisse Global Wealth Report. Adults with less than $10,000 in wealth account for 53.6% of the worldwide population but only have 1.4% of global wealth, according to their findings. Individuals with assets worth more than $100,000 account for 12.4% of the world population but 83.9% of global wealth.

According to Forbes, the world's top ten billionaires hold a combined fortune of $1,14 trillion, which is more than the entire products and services produced by most countries on an annual basis. According to Forbes' 2021 ranking, the world is home to 2,755 billionaires.

Extremely wealthy people have amassed their riches on the backs of others all around the world who labour for low salaries and in hazardous conditions.

The wealth gap between the world's billionaires and the bottom half of humankind is widening, according to Oxfam. The number of billionaires required to match the wealth of the world's poorest half reduced from 380 to 26 between 2009 and 2018.

A ‘high net worth individual’ according to Capgemini, is someone with at least $1 million in investment assets (not including their primary residence and consumer goods). In 2019, the total number of high-net-worth people surpassed 19 million.

The great majority of them have assets worth less than $5 million. The top tier of these rich individuals, those worth at least $30 million, grew dramatically in 2019 after dipping marginally in 2018 due to a fall in equities markets, according to the Capgemini annual study.

Distribution of wealth graph

The degree of wealth inequality can be depicted on a Lorenz curve graph. Figure 6 below shows a Lorenz Curve.

distribution of wealth Lorenz curve studysmarterFigure 6. Lorenz Curve, StudySmarter Original

In the Lorenz curve, the population percentile is on the horizontal axis. The vertical axis represents the cumulative wealth percentile. If everyone in an economy possesses the same amount of wealth, there is perfect equality in wealth. In that case, we would have the Lorenz curve match the 45° straight line with a slope of 1, also known as the line of equality.

The Lorenz curve presents the inequality either in income or wealth, not both at the same time. Income and wealth are not synonymous since it would be possible to have high earnings but zero net wealth or large assets and wealth but no income.

Interpreting the data from the Lorenz curve is simple. Pick a point from the x axis and read off the y axis. For example, reading off the diagram, 50% of the population has access to up to and including 5% of the country's wealth. In this example, wealth is distributed very unequally as half of the population has a very small share of the country’s wealth.

Distribution of Wealth - Key takeaways

  • Wealth denotes the current market value of the total assets that a firm, household, or government own at a given time.
  • Wealth distribution is a comparison of wealth among various people of a particular community. This metric examines the economic distribution of ownership in a community rather than its income. Assets minus liabilities equals net worth or wealth.
  • Net property wealth, net financial wealth, physical wealth, and private pension wealth all contribute to total wealth.
  • The main factors influencing the distribution of wealth include capital gains benefit, private pension assets, inheritance, and the difference in tax between income and wealth.
  • The reasons for wealth inequality in the UK include pension inability, property prices, savings ability, increased income disparity, and capital returns.
  • The global wealth gap between the world's billionaires and the bottom half of humankind is widening.

Sources

  1. Office for National Statistics, ‘Wealth in Great Britain Wave 5: 2014 to 2016’, ons.gov.uk.
  2. Federico Cingano, ‘Trends in Income Inequality and its Impact on Economic Growth’, OECD Social, Employment and Migration Working Papers, 2014.
  3. Thomas Piketty, Capital in the twenty-first century, 2019.

Frequently Asked Questions about Distribution of Wealth

Wealth distribution is a comparison of wealth among various people of a particular community. This metric examines the economic distribution of ownership in a community rather than its income. Assets minus liabilities equals net worth or wealth.

When there's more equal distribution of wealth, it allows for overall higher consumption from individuals. This then results in higher economic growth.

Variation in the pension, property prices, savings ability, and capital returns.

Distribution of wealth in the world is a comparison of wealth among various people in the world.

The factors that affect wealth are the market prices of the stocks or assets that an individual or household own.

Final Distribution of Wealth Quiz

Question

What is wealth distribution?

Show answer

Answer

Wealth distribution is a comparison of wealth among various people of a particular community. This metric examines the economic distribution of ownership in a community rather than its income. Assets minus liabilities equals net worth or wealth.

Show question

Question

How is individual wealth measured?

Show answer

Answer

Individual wealth is often measured in terms of net worth, which is the sum of your aggregate assets minus the sum of your aggregate liabilities.

Show question

Question

How is wealth defined in Economics?

Show answer

Answer

In economics, wealth denotes the current market value of the total assets that a firm, household, or government own at a given time.

Show question

Question

What are some of the ways wealth is created?

Show answer

Answer

 It takes into account human capital and natural resources, rather than money and securities. Wealth can be created in different ways:


  • Savings held in bank deposits
  • Ownership of shares issued by listed companies and equity stakes in private companies
  • Ownership of property
  • Wealth held in bonds
  • Funds in occupational pension schemes and life insurance policies

Show question

Question

What's the difference between income and wealth?

Show answer

Answer

Income refers to money received periodically in exchange for products or services provided or the capital invested whereas wealth implies the assets and properties owned by a person during his course of life.

Show question

Question

What's the difference between income and wealth in terms of how they are acquired?

Show answer

Answer

Income is generated immediately over a limited time.

Wealth is accumulated over a period of time.


Show question

Question

What are the types of wealth?

Show answer

Answer

The types of wealth include: net property wealth, net financial wealth, physical wealth, and private pension wealth all contribute to total wealth.

Show question

Question

Explain property wealth.

Show answer

Answer

Property wealth refers to any privately held property in the United Kingdom or elsewhere.

Show question

Question

Explain physical wealth.

Show answer

Answer

Physical wealth refers to the value of a household's physical goods, such as antiques, artwork, automobiles, and customized license plates.

Show question

Question

What is private pension wealth?

Show answer

Answer

Private pension wealth is the value of private pension plans from which individuals can draw an income now or in the future. 

Show question

Question

What are the reasons for wealth inequality in the UK?

Show answer

Answer

Pension inability

Property prices

Savings ability

Increased income disparity

Capital returns

Show question

Question

How has pension inability impacted wealth inequality in the UK?

Show answer

Answer

In recent years, wealthier households have been able to raise their payments to private-sector pensions. (For the wealthiest 30% of families, private pension money contributes the most to overall wealth). Despite weak stock market returns diminishing the value of certain pensions and asset trusts, pensions have grown in importance.

Show question

Question

How have property prices impacted wealth inequality in the UK?

Show answer

Answer

Since the 1960s, property prices in the United Kingdom have risen at a significantly higher rate than inflation. Rising property prices have resulted in a significant increase in household wealth for property owners. The divide between property owners and non-property owners has grown as a result of this. This has been worked by the rise in second houses and buy-to-let properties, which allow families to build a property portfolio.

Show question

Question

How does the saving ability impact wealth inequality?

Show answer

Answer

Low-income people rarely have the ability to save. They have a high marginal proclivity for consumption. People with greater salaries have a reduced marginal propensity to consume, and they have the opportunity to save (for example, in private pensions and personal savings accounts) after purchasing needs.

Show question

Question

What are the factors influencing wealth distribution?

Show answer

Answer

The main factors influencing the distribution of wealth include capital gains benefit, private pension assets, inheritance, the difference in tax between income and wealth.

Show question

Question

How would you define wealth?

Show answer

Answer

Wealth denotes the current market value of the total assets that a firm, household, or government own at a given time. 

Show question

Question

_________  refers to money received periodically in exchange for products or services provided or the capital invested. 

Show answer

Answer

Income

Show question

Question

The market price of the stock or asset owned by an individual or household. 

Show answer

Answer

Wealth

Show question

Question

The flow of money obtained by various factors of production. 

Show answer

Answer

Income

Show question

Question

_________ is generated immediately over a limited time. 

Show answer

Answer

Income

Show question

Question

Income gets accumulated over a period of time. 

Show answer

Answer

False

Show question

Question

________ is any privately held property in the United Kingdom or elsewhere. 

Show answer

Answer

Property wealth

Show question

Question

____________ is the value of a household's physical goods, such as antiques, artwork, automobiles, and customised license plates. 

Show answer

Answer

Physical wealth

Show question

Question

Capital gains are the value a person receives from property prices or stocks they’ve invested in. 

Show answer

Answer

True

Show question

Question

When income is taxed more, it will cause an _______ distribution of wealth.  

Show answer

Answer

unequal

Show question

Question

The UK tax for income is higher than it is for wealth.


Show answer

Answer

True

Show question

Question

The reasons for wealth inequality in the UK include pension inability, _________, savings ability, __________, and ___________.

Show answer

Answer

The reasons for wealth inequality in the UK include pension inability, property prices, savings ability, increased income disparity, and capital returns.

Show question

Question

The Lorenz curve at a 45° is called _________.

Show answer

Answer

line of equality

Show question

Question

The global wealth gap between the world's billionaires and the bottom half of humankind is narrowing. 

Show answer

Answer

False

Show question

Question

____________ examines the economic distribution of ownership in a community rather than its income. 

Show answer

Answer

Wealth distribution

Show question

Question

Assets - liabilities = 

Show answer

Answer

Net worth (or wealth)

Show question

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