Income Distribution

The second economic issue concerns the distribution of income. You and your family have an annual income which allows you to enjoy various goods and services, live in a particular neighbourhood, and maintain a certain standard of living. Your standard of living will include what you think of as the necessities of life — food, shelter, health, education — but also something beyond, such as recreation. Your income will be less than some of your neighbours but more than that of some other people, both in this country and abroad.

Nations also have different levels of income. A nation’s income, or national income, is the sum of the incomes of all the people living in that country. World income is the sum of all countries’ incomes or the sum of the incomes earned by all the people in the world. We want to look now at the distribution of world income and national incomes to ask who in the world gets what share of these incomes.

About 60 per cent of the world’s population live in poor countries. A little over a quarter live in middle-income countries. The rich industrial countries, including the United States, Western Europe, Canada, and Japan, account for 16 per cent of world population. We want to examine how incomes differ between these groups of countries.

In poor countries the average income per person is only 180 pounds per year, or just 50p per day. In the rich industrial countries income is 9015 pounds per person per year, over fifty times larger. These are striking differences. They are differences not between the poorest person in the world and the richest but between the average person in a country such as India and an average person in a country such as the UK or the United States.

More than half the world’s population, living in the poor countries, receives only 6 per cent of total world income. The 16 per cent of world population living in the industrial countries, including the UK, receives nearly 80 per cent of the world income. These income differences raise a number of questions both for society and for economists.

For whom does the world economy produce? Essentially, for the 16 per cent of its population living in the rich industrial countries. This answer about for whom the goods and services are produced also suggests the answer to what is produced. World population will be directed chiefly to the goods and services consumed in the rich industrialized countries.

Why are there such large differences in incomes between groups? This relates to the question of how goods are produced. In the poor countries there is very little machinery relative to the size of the population, and the proportion of the population with professional and technical training is also small. In an industrialized country a worker may use power-driven earth-moving equipment to accomplish a task that is undertaken in a poor country by many more workers equipped only with shovels. Workers in poor countries are much less productive because they work under highly unfavourable conditions.

Income is unequally distributed within each country as well as between countries. In countries such as the UK and the United States, the top 20 per cent of families receive a smaller share of national income than in such countries as Brazil but a larger share of national income than in countries such as Denmark.

In part, these differences can be attributed to factors we have already discussed. However, when examining the income distribution within a country we must take account of two additional factors, which can largely be neglected when discussing differences in income per person between countries.

First, individual incomes come not just from working but also from ownership of assets (land, buildings, corporate equity) which earn rent, interest payments, and dividends. In comparing national incomes (in total or per person) it does not matter which members of the population own these assets and earn this income; in assessing the distribution of incomes within a country, it does matter.

Second, acting through their governments, societies can decide whether or not to take steps to change the distribution of income. A state-owned economy aims to produce a fair degree of equality of income and wealth. In an economy of private ownership, wealth and power may become concentrated in the hands of a few rich families. Between these extremes, the government may levy taxes to alter the income distribution that would otherwise have emerged in a private ownership economy. One reason why Denmark has a more equal income distribution than Brazil is that Denmark levies high taxes on inheritances to reduce the concentration of wealth in the hands of a few families.

The degree to which income is unequally distributed within a country will directly affect the question of for whom goods and services are produced, but it will also affect what goods are produced. In Brazil, where income is uniquely distributed, many people work as domestic servants, chauffeurs, and maids. In Denmark, where income is much more evenly distributed, few people can afford to hire servants.

Notes

1. annual income — годовой доход;

2. in a particular neighbourhood — в определенном месте;

3. maintain a certain standard of living — поддерживать определенный уровень жизни;

4. shelter — жилище;

5. recreation — отдых;

6. national income — национальный доход;

7. a little over a quarter — немногим больше четверти;

8. average income per person — доход на душу населения;

9. suggests the answer — подсказывает ответ;

10. chiefly — главным образом;

11. relative to — относительно;

12. to accomplish a task — выполнить задачу;

13. under highly unfavourable conditions — в крайне неблагоприятных условиях;

14. take account of — учесть;

15. ownership of assets — собственность на средства производства;

16. a state-owned economy — экономика, опирающаяся на государственную собственность;

17. to levy taxes — облагать налогами;

18. a private ownership economy — экономика, опирающаяся на частную собственность.