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Chapter 19 Notes.docx

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Economics 1021A/B
Jeannie Gillmore

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Chapter 19 Notes Measuring Economic Inequality  market income equals the wages, interest, rent, and profit earned in factor markets before paying income taxes  total income equals market income plus cash payments to household by governments  after-tax income equals total income minus tax payments by households to governments Distribution of Income  in Canada, the mode income in 2009 was received by 7% of households, and fell between $30 000 and $34 999 o the median income was $48 300 o average income was $59 700  Canada has a positively skewed distribution of incomes Income Lorenz Curve  graphs the cumulative percentage of income against the cumulate percentage of households  provides a direct visual clue about the degree of income inequality by comparing it with the line of equality o if income were distributed equally across all the households, each quintile would receive 20% of total income  line of equality o the closer the Lorenz curve is to the line of equality, the more equal is the distribution of income Distribution of Wealth  a household’s wealth is the value of the things that it owns at a point in time o income is the amount that a household receives over a given period of time  wealth is much more unequally distributed than is income o wealth is a stock of assets, and income is the flow of earnings that results from the stock of wealth  e/x %5 rate of return on $1 000 000 worth of assets is an income of $50 000 o wealth is more unequally distributed than income as wealth data do not include the value of human capital, while the income data measures income form all wealth including human capital Annual and Lifetime Income and Wealth  a typical household’s income changes over its life cycle o starts out low, grows to a peak when the household’s workers reach retirement age, and then falls after retirement o wealth also starts out low, grows to a peak, then falls after retirement  consider three households with identical life-time incomes: one young, one middle- aged, one retired o middle-aged household has the highest income and wealth  retired the lowest  young in the middle  distributions of annual income and wealth in a given year are unequal, but the distributions of lifetime income and wealth are equal  inequality in annual income and wealth data overstates lifetime inequality because households are at different stages in their lifecycles Trends in Inequality  the Gini ratio equals the ratio of the area between the line of equality and the Lorenz curve to the entire area beneath the line of equality o the larger the Gini ratio, the greater is the degree of income inequality o if income is equally distributed, the Lorenz curve is the same as the line of equality, so the Gini ratio is 0 o if one person has all the income and everyone else has none, the Gini ratio is 1  in Canada, there is an upward trend in inequality o Gini ratio has increased from 0.37 to 0.45 between 1976 and 2009 Poverty  poverty is a state in which a family’s income is too low to be able to buy the quantities of income is too low to be able to buy the quantities of food, shelter, and clothing that are deemed necessary  in Canada, poverty is identified in relative terms using the concept of the low-income cut-off, defined as the income level below which a family normally spends 63.6% or more of its income on food, shelter, and clothing o incidence of poverty has fluctuated between 14-20%  no trend, average of 17%  factors affecting poverty incidence: o education o labour force status o source of income o household type o age of householder o number of children  most poverty is temporary  75% of those in poverty remain in that state for less than 1 year Income Distributions in Selected Countries  many European countries have governments that pursue aggressive income redistribution  Brazil and South Africa are extremes not matched in any other major country or region o inequality is large because they have a relatively small but rich European population and a large and relatively poor indigenous population  Canada lies in the middle Global Inequality and Its Trends  the global distribution of income is much more unequal than the distribution within any one country o due to the fact that many countries (especially in Africa and Asia) are in a pre- industrial stage of economic development and are poor), while industrial countries such as Canada and Western European countries are rich  the average Canadian earns 66 times the income of one of the world’s 3 billion poorest people and more than 16.4 times the income of 80% of the people who live in developing economies o a Canadian with the lowest income in the highest income quintile earns 96 times that of the world’s poorest people but only 9 times that of an average Canadian in the lowest quintile  world Gini ratio o the Canadian Gini ratio in 2009 was 0.45 o the world Gini ratio was about 0.64  the world Lorenz curve lies much farther below the Canadian Lorenz curve  world trend o the same trend of increasing in equality in Canada also exists in many other countries o increased income inequality is a big issue in two of the world’s largest and poorer nations, China and India  in these economies, urban middle classes and getting richer at a faster pace than the rural farmers o despite the greater inequality within countries, the world is becoming less unequal  the world Gini ratio is decreasing  summary: o the average incomes in poorer countries are rising much faster than average incomes in rich countries o the gap between rich and poor is widening within countries, and is narrowing across countries Sources of Economic Inequality: Human Capital (example: law clerk and lawyer)  the tasks that a lawyer performs are valued highly by their clients who willingly pay for their services o a lawyer has a high value of marginal product, and a higher value of marginal product than her law clerk  because a lawyer has a high value of marginal product, there is also a high demand for her services  to become a lawyer, a person must acquire costly human capital o because the human capital needed to supply lawyer services is costly to
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