Economics help blog – Page 92

Wealth Inequality in the UK

27 February 201916 July 2018 by Tejvan Pettinger

New statistics from the ONS, show that there are large disparities in wealth within the UK. In 2010/12, aggregate total wealth of all private households in Great Britain was £9.5 trillion, (increasing from £9.0 trillion in 2008-10.

Some highlights from the report

The wealthiest 10% of households owned 44% of total aggregate household wealth.
The richest 1% have accumulated as much wealth as the poorest 55% of the population
The poorest 50% of the population only have 9% of total wealth.
Half of all households had total wealth of £218,400 or more.
In 2010/12 the wealthiest 20% of households had 105 times more aggregate total wealth than the least wealthy 20% of households. In comparison, in 2008/10 the wealthiest 20% of households had 92 times more aggregate total wealth than the least wealthy 20% of households.
The report doesn’t capture wealth in offshore havens.
The most wealthy group are those around retirement age (55-64), with no children.

Source: Wealth and Assets Survey – Office for National Statistics

Definition of wealth

Wealth is a stock of assets that an individual has at any particular time; this can be assets in the form of money, pension, shares or property. The ONS split wealth into four main categories

Total wealth net property wealth, net financial wealth, physical wealth and private pension wealth.

Property wealth – any property privately owned in the UK or abroad (£3.5tn 2012)
Physical wealth – Value of physical assets owned by a household, e.g. antiques, artworks, vehicles and personalised number plates. (£1.1tn 2012)
Financial wealth – Net financial wealth is calculated by subtracting from financial asset values the value of any financial liabilities. (i.e.. savings – debt) (£1.3tn 2012)
Private pension wealth –The value of private pension schemes in which individuals can receive income from either now or in future. Private pension wealth was the largest component of aggregate total wealth. (£3.58tn 2012)

Facts about wealth inequality

11% of households in UK owned other property than their main residence 2010/12
24% of households had no private pension wealth in 2010/12
25% of households had outstanding amounts on credit card debts
7% of households had a personalised number plate
48% of households had an individual savings account ISA.

Regional inequality

The average wealth of households in the South East had increased to £309,000 at the end of 2012, up 30% since 2006-8 –
The average rise in England was only 6%.
Wealth in the north-east had fallen to just under £143,000.
In Scotland, the average wealth is £165,500
London had the biggest increase in household median wealth with a 31% increase.

Lorenz curve for individual wealth components

The closer the curve is to the line the greater the equality of distribution. Financial wealth has the greatest degree of inequality.

This shows that the poorest 60% of households had negative financial wealth (debt greater than savings)

ONS report

Why does the Government Borrow?

17 January 20205 July 2018 by Tejvan Pettinger

Readers Question: Why does the government borrow? Essentially, the government borrows so that it can enable higher spending without having to increase taxes. The annual amount the government borrows is known as the budget deficit. The total amount the government has borrowed is known as the national debt or public sector debt. There are many …

Does a trade war cause a recession?

5 July 2018 by Tejvan Pettinger

A trade war involves the imposition of tariffs between trading partners. This will almost certainly cause a fall in economic welfare for all the countries who experience higher tariffs and a fall in trade. However, this fall in economic welfare is not the same as a recession (a fall in GDP). In some circumstances, a …

How do interest rates affect savers and saving levels?

12 February 20191 July 2018 by Tejvan Pettinger

Interest rates determine the amount of interest payments that savers will receive on their deposits.

An increase in interest rates will make saving more attractive and should encourage saving.
A cut in interest rates will reduce the rewards of saving and will tend to discourage saving.

However, in the real world, it is more complicated. The link between interest rates and saving is not clear because many factors affect saving.

In 2009, the household saving ratio increased from 0.5% to over 8% – despite a cut in interest rates from 5 to 0.5%. This was because the impact of the recession encouraged saving. The fear of unemployment and recession was greater than the effect of lower interest rates

Income and substitution effect of higher interest rates.

If interest rates fall, the reward from saving falls. It becomes relatively more attractive to hold cash and/or spend. This is the substitution effect – with lower interest rates, consumers substitute saving for spending.
However, if interest rates fall, savers see a decline in income because they receive lower income payments. A pensioner relying on interest payments from saving may feel he needs to save more to maintain their target income from savings.

Usually, the substitution effect dominates. Lower interest rates make saving less attractive. But, for some, the income effect may dominate, and people may respond to lower interest rates by saving more to maintain their standard of living.

Alternatively, a lower interest rate may encourage other forms of saving and investment. With very low bank rates, it has encouraged people to look for better yields in the stock market. This is one reason why the stock market did well in the great recession of 2008-2013 – savers have been buying shares to get a better rate of interest rate than they can in a bank and on bonds.

Base rates and bank rates

Usually, a cut in Central Bank base rates leads to an equivalent fall in bank rates. However, in the aftermath of the credit crunch, bank rates didn’t fall as much as base rates. In the UK, bank rates (e.g. Libor were higher). Therefore, the cut in base rates didn’t have as much impact. After the impact of the credit crunch diminished the UK saw a fall in Libor rates, and bank rates came closer to base rates.

(instant access saving rates starts Jan 2011.)

Are Coffee Prices Fair?

10 March 202026 June 2018 by Tejvan Pettinger

If coffee beans cost 4 pence per cup, how can big retailers like Starbucks or Costa Coffee sell a small cappuccino for £3.00? Comment from: Is the Price of Starbucks a rip off? Is the price of Starbucks coffee a rip off you ask… I have seen on this website you have written some article …

Money Multiplier and Reserve Ratio

27 November 201919 June 2018 by Tejvan Pettinger

The Money Multiplier refers to how an initial deposit can lead to a bigger final increase in the total money supply. For example, if the commercial banks gain deposits of £1 million and this leads to a final money supply of £10 million. The money multiplier is 10. The money multiplier is a key element …

Who are the winners and losers from free trade?

15 June 2018 by Tejvan Pettinger

Readers question: Who are the winners and losers from free trade? Free trade means that firms can export and import goods without tariff barriers. Free trade leads to lower prices and increased exports and imports. Economists are generally agreed that free trade leads to a net gain in economic welfare; as a result, economists generally …

Government intervention in the labour market

12 June 2018 by Tejvan Pettinger

Government intervention in the labour market to reduce inequality and market failure can take various forms. Minimum wages/living wages Maximum wages (rarely used) Legislation to prevent discrimination on the grounds of age, sex, religion. Legislation to support or regulate trade unions. Maximum working week Legislation on health and safety Behavioural nudges (e.g. encouraging workers to …