Chapter 8 Distribution Economics 11. as we know, each society has to answer the three major questions what, how and for whom. chapter 8 is focused on.

Chapter 8 Distribution

Economics 11

• as we know, each society has to answer the three major questions what, how and for whom.

chapter 8 is focused on the “for whom”, the distribution of national income

• everyone would like more income, with more income we have more money to buy goods and services available in the market; we have more purchasing power

• in our economic system, income is distributed among the different factors of production: land, labour, capital and entrepreneurial ability

an individual’s income depends on what an individual owns of these factors

• most income earners own at least one factor of production – their own labour

• wages are a regular payment to employees for their labour services

• the amount of income received (be it rent, wages, interest or profit) is determined by what the person is able and willing to supply

• the market does not reward the intrinsic value of what you do, it rewards your economic value

Factors affecting wages and salaries

government regulations – the government sets minimum wage rates, declares certain days of the year to be holidays, and requires employers to give employees a certain amount of vacation time per year.

Factors affecting wages and salaries

labour unions – these collective organizations use their power to maintain or increase the salaries of their members, and working conditions.

Factors affecting wages and salaries

large employers – a large employer in a small town has power to keep wages lower than if the market were competitive

Factors affecting wages and salaries

mobility of workers – if there are high wages in one part of the country, then workers from other parts of the country will tend to move there

Factors affecting wages and salaries

education or specialized training - barriers to entry in a profession in the form of specialized training will tend to result in higher wages

differences in wages often reflect differences in the investment in human capital (like education, training)

• other ways to earn income: interest income Rental income Income from profits

Interest Income• some people earn income off of interest if they

own financial capital (money)

• interest is the price paid to a lender for the use of a sum of money over a period of time

• many consumer goods such as cars, boats and houses are purchased with borrowed money

consumers are willing to pay a rate of interest in exchange for having goods or services immediately

Rental Income

• some people earn income from rent if they own a property or properties

• in every urban center, there is one area where the crowds are thickest this is the area of prime commercial real estate the rents here are high because there is a demand for prime locations

Income from Profits

• entrepreneurs get income from profits

• profit is what is left over after all the costs of a business have been met

• profit is the reward or return to the entrepreneur for undertaking the risk of establishing and operating a business

business people cannot know in advance how consumers will react to their products

Income from Profits

• profit is the reward for the entrepreneur’s efficient combination of the factors of production and the successful anticipation of the wants of consumers

• profits encourage entrepreneurs to innovate

• innovation stimulates employment, investment, and output it is one of the principal causes of economic growth

the GDP

• the gross domestic product (GDP) measures the total value at market prices of all final goods and services produced in Canada over a period of time (usually a year)

the GDP

value at market prices –

because our economy produces a huge array of goods and services we need to have a common standard in order to add them – this is why we use the market price

the GDP

final goods and services – final goods/services mean only those

goods/services that are not going to be sold again

- for example the price of bread is included in the GDP but not the price of flour and wheat

the GDP

produced in Canada – the GDP measure the domestic output of

goods and services, meaning the output from within Canada

• the GDP differs from the Gross National Product (GNP) in that the GNP calculates the output of Canadian owned resources no matter where they may be

• there are two ways of calculating the GDP, the expenditure

approach and the income approach

Income Inequality

• there are substantial differences in incomes in Canada

• the Lorenz curve is a way of demonstrating the income inequality

- see figure 8.9 on page 171

• complete equality is shown by the diagonal line

the degree of inequality is shown by the amount of bow, or by the amount in the slice between the curve and the diagonal line

Income Inequality

• The poor in Canada are defined as those whose standard of living is below a certain level (usually called the "poverty line") and those who have serious difficulties participating actively in the life of society.

Income Inequality• there are many causes of income inequality,

some of these are listed below:

- natural ability - education, training, and opportunity - property ownership - ability to influence wages and salaries (unions,

professional associations) - discrimination - poor health or physical disability - region of residence - luck - weeks worked (seasonal work)- age

Income Inequality

government anti-poverty programs:

• old age security, pension, EI and social assistance

these programs only deal with the symptoms of poverty, not the causes

Income Inequality

programs to reduce the causes of poverty:

• governments encourage the investment in human capital they pay for school completely from primary to grade 12 they pay some of the costs of community colleges and universities they offer loans to post-secondary students

• government safety programs help protect workers from injuries in the workplace

• provincial health insurance programs

Income Inequality

• in addition to programs that are intended to reduce poverty there are two types of programs that give relief from the symptoms of poverty

1.) social insurance programs Health Insurance

- in Canada we have a health insurance program that provides health care to citizens at little or no cost to the patient (does not include dental care)

Income Inequality

1.) social insurance programs

Employment Insurance (EI) (in the text it’s Unemployment Insurance)

- a program that aims to diminish the financial hardship caused by unemployment

- contributions to EI are made by both employer and

employee (it’s a mandatory contribution)

Income Inequality

1.) social insurance programs

Canada Pension Plan (CPP)

- benefits are payable when the individual reaches age 65

- CPP is funded by compulsory employer and employee contributions

Income Inequality

2.) other programs (directed at those in financial need)

– old age security pension – guaranteed income supplement – child tax benefit (family allowance)

– Canada Assistance program

Income Assistance (aka welfare, income support, social assistance)

Income Assistance

How Having a Job Affects Income Assistance

• If you continue to receive Income Assistance after getting a job, you will be eligible to keep the first $150 you earn, plus an incentive of 30% of your remaining net wages.

• The Income Assistance program may also assist you while you work in a number of different ways: – As long as you receive Income Assistance you will continue to receive

pharmacare benefits. – If the money you make from your job causes your Income Assistance to

end, you may still receive pharmacare benefits for up to one year. – We can assist with your child care costs if it will help you keep working. – If you have to travel in order to reach your job, we can help you pay for

this as well. – We can also help you buy work-related items, such as uniforms, work

boots, or associated fees for things such as a drivers licence or criminal background check.

Employment Insurance (EI)

• Employment Insurance (EI) provides temporary financial assistance to unemployed Canadians who have lost their jobs through no fault of their own, and to Canadians, including unemployed self-employed citizens or permanent residents who are unable to work for a variety of reasons.

Am I eligible for EI regular benefits?

You may be entitled to receive EI regular benefits if you:– have paid premiums into the EI Account; – Lost your employment through no fault of your own; – have been without work and without pay for at least seven consecutive

days in the last 52 weeks; – have worked for the required number of insurable hours in the last 52

weeks or since the start of your last EI claim, whichever is shorter; – are ready, willing, and capable of working each day; and – are actively looking for work (you must keep a written record of

employers you contact, including when you contacted them).

You may not be entitled to receive EI regular benefits if you:– voluntarily left your employment without just cause; – were dismissed for misconduct; or – are unemployed because you are directly participating in a labour

dispute (strike, lockout, or other type of dispute).

GST/HST Credit

• The GST/HST Credit program issues payments to Canadians with low and modest incomes to help offset all or part of the GST/HST they pay on the purchase of goods and services. The Canada Revenue Agency Web site provides information on application procedures, eligibility, payment of the GST/HST credit and procedures to follow in case of overpayment.

Canada Child Tax Benefit

• The Canada Child Tax Benefit (CCTB) is a tax-free monthly payment made to eligible families to help them with the cost of raising children under age 18.

Old Age Security Pension

• The Old Age Security (OAS) Pension is a monthly benefit available to most Canadians 65 years of age who meet the Canadian legal status and residence requirements. You must apply to receive benefits.