4.8 • +11k Ratings
Save
Print
Edit
Did you know that equity and equality aren’t the same? Equality is about everyone being equal, while equity is all about fairness. In this explanation, we will look at how we can distribute income in the economy in a more fair way. Interested? Then dive in!
Before we consider what the equitable distribution of income is and what it looks like, let's briefly recap inequality and income in economics.
Inequality in economics can be measured in two different ways: income inequality and wealth inequality.
Income is a flow of earnings received at a certain rate in a given period, such as a salary or rental earnings.
In this article, we will stick to briefly covering income and income inequality. If you want to learn more about wealth, income and wealth inequality in more detail, check out our Distribution of Income and Distribution of Wealth articles.
Income inequality is the degree to which income is distributed unequally throughout a population.
Economists measure the distribution of income and income inequality in a country and globally through a variety of methods and ratios. The most common measures of income inequality are the Lorenz Curve and the Gini Coefficient.
Income is distributed differently across countries. In some countries, like Norway, income is distributed quite equally. In others, income is very unequally distributed and that causes many economic and social problems like social unrest, poverty, etc.
Figure 1 below shows how gross disposable household income (GDHI) per head is distributed in the UK, constituent countries and regions in 2019.
Figure 1. GDHI per head of the UK, constituent countries and regions, StudySmarter Originals. Source: ONS
As you can see, income in the UK and its constituent countries is distributed quite unequally. London has the highest GDHI per head at £30,256. The North of the UK, on the other side, has the lowest GDHI per head at £17,096, nearly half London's GDHI. 1
As you saw in Figure 1, income tends to congregate in a particular part of a country or within a particular group of people. Why is that?
There are many reasons why income is distributed unequally across a nation and around the world. Some of these reasons are:
Income in many countries, including the UK, tends to be distributed unequally. More equitable distribution of income would mean that income is distributed in a fair way. There are many micro and macroeconomic policies a government can implement to tackle income inequality and distribute it more equitably.
Some of these policies include:
We have considered only two policies. If you want to learn more about this topic, check out our Government policies on poverty and wealth explanation.
Countries with a more equitable distribution of income
The countries with the lowest rates of income inequality in the world are Denmark, Sweden, Iceland, Norway, and Finland - the Nordic countries.
These Nordic countries have a mixed economy: they use a combination of both capitalism and socialism.
Figure 2 compares their Gini Coefficients. We can see that income is distributed quite equally in these Nordic countries compared to other Western countries, like the US and UK.
Figure 2. Gini coefficient in six countries, StudySmarter Originals. Source: OCED, data.oced.org
A Gini coefficient of 1 represents complete inequality, while 0 represents complete equality.
As we can see, all Nordic countries have a coefficient below 0.3, which indicates low levels of income inequality.
There are many benefits to an equitable distribution of income. We can see some of these benefits in the Nordic countries too. Some benefits are:
Equitable distribution of income is a good thing. But it can have some economic drawbacks. Some of these are:
A millionaire sets up a business that further increases their income and wealth. But this business creates jobs and incomes for many other people. This does widen the gap between rich and poor, but one could argue that the poor are better off than without the millionaire.
The trickle-down theory
We can explain how some economists believe the trickle-down effect works in three stages:
The trickle-down effect does have its fair share of criticism because despite the theory it doesn't seem to work in real life. Some argue that the rich have a high marginal propensity to save (MPS). Their savings are a withdrawal from the circular flow of income and thus don’t benefit the economy.
The rich are also more likely to avoid taxes, so the government will receive less in tax revenue to redistribute to poor individuals. Essentially, the rich get richer and the poor get poorer.
1. Office for National Statistics (ONS), 2019
2. JSA: UK Government, 2022
3. Office for National Statistics (ONS), 2021
Equitable distribution of income means that income is distributed in a way that ensures fairness and allows everyone to have the same opportunities. Equitable distribution of income doesn’t mean that income is distributed equally; it just means that income is distributed in a fair way.
Some solutions to achieve equitable distribution are:
Progressive tax systems.
Investing in the welfare systems.
Access to education and healthcare.
Iceland is ranked as the country with the most equitable distribution of income in the world. Other countries like Sweden, Finland, Norway, and Denmark also rank very high.
Equitable distribution of income is important because it allows for a fairer economic system. This leads to a more cohesive society that can benefit the larger economy.
Equity distribution means that every individual receives and has access to the same share of the country’s national income. Equitable distribution means that every individual receives and has access to a fair share of the country’s national income.
60%
of the users don't pass the Equitable Distributions of Income quiz! Will you pass the quiz?
Start Quiz
Be perfectly prepared on time with an individual plan.
Test your knowledge with gamified quizzes.
Create and find flashcards in record time.
Create beautiful notes faster than ever before.
Have all your study materials in one place.
Upload unlimited documents and save them online.
Identify your study strength and weaknesses.
Set individual study goals and earn points reaching them.
Stop procrastinating with our study reminders.
Earn points, unlock badges and level up while studying.
Create flashcards in notes completely automatically.
Create the most beautiful study materials using our templates.
Sign up to highlight and take notes. It’s 100% free.
