- chapter 2
The income distribution
Most people receive some form of income. This may be primary income or transfer income or a combination of the two. When you add up all the primary incomes of a country, you get the national income of a country. Primary incomes are earned when people start using the factors of production which they possess -labour, nature, capital and entrepreneurship- in the production process. The money that is subsequently earned with that production process is distributed in the form of wage, lease, rent, interest and profit among the owners of the factors of production that have been used. A part of the primary incomes must be transferred to the government, which in turn pays out part of them as transfer income to the people who receive no or insufficient income to support themselves.
Not everybody earns the same amount of money. The extent of the relative income differences can be represented by means of a Lorenz curve. The farther the Lorenz curve lies away from the (imaginary) centre, the greater the income differences. When income differences are too great they affect prosperity.
Since the 1930s economists have used the growth of the per capita gross domestic product (GDP) as a criterion for measuring whether prosperity has increased. The reasoning is that a higher per capita GDP implies that there are more goods and services available per head so that more needs can be fulfilled. Nowadays, however, there is an ever stronger need for a broader concept of prosperity and other methods have been developed to measure the degree of prosperity, such as the Human Development Index and the green GDP.
Glossary chapter 2
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- extra exercises
Extra exercises (Word)