ECON361 Final: Econ 361 Final Exam Review

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8 May 2016
Econ 361 Final Exam Review
Class 1 - Intro
Individual’s feeling about inequality are often framed as a question of justice. There
are many theories of justice, two that are popular today:
1. John Rawls’s Distributive Justice – rooted in a ‘veil of ignorance’; Rawls
calls for an equitable distribution of things people care about, including
income, wealth, liberties, opportunities. Economic inequality is OK as long as
there is equality of opportunity and it works to everyone’s benefit (i.e. via
incentives to work hard or innovate)
2. Robert Nozick’s Entitlement Theory – Nozick is primarily concerned with
the distribution of property; for him, justice has three main elements: a)
Justice in acquisition b) Justice in transfer c) Rectification of injustice. A
person’s most basic right is self-ownership and by extension the ownership
of their labour and what is produces. Involuntary transfers (i.e. taxes that can
be used for redistribution) are undesirable
Equality of What? Inequality Re-examined (pg 12-22)
Amartya Sen addresses ‘Why Inequality?’ and ‘Equality of What?’. He argues that the
equality of what is a more important question than ‘why inequality’. Different
theories give different answers to the question ‘equality of what’. Cannot begin to
defend or criticize equality without knowing what we are talking about (i.e. income,
wealth, opportunities, etc), and so we cannot answer ‘Why Inequality’ without first
deciding equality of what. Also, inequality in terms of one variable (i.e. income) may
take us in a very different direction than inequality in the space of another variable
(i.e. functioning ability or well-being). Humans have different external
characteristics and circumstances, begin life with different endowments, live in
different environments, etc. and so there is difficulty in choosing the relevant
variables (problem of the choice of the evaluative space). One of the consequences
of human diversity is that equality in one space tends to go with inequality in
another. Importance of equality is often contrasted with liberty, since they
sometimes go against one another. Sen argues it is faulty to look at it this way,
saying that the issue of equality immediately arises as a supplement to the assertion
of the importance of liberty. Recognizing the plurality of spaces that equality can be
assessed can raise doubts about the powerfulness and importance of equality as a
political idea. Sen argues that this is not a good argument because if someone is
arguing for equality they would define the space. Income is not necessarily good for
inequality since the extent of real inequality of opportunities that people face cannot
be readily deduced from the magnitude of inequality of incomes since what we
can/cannot do/achieve doesn’t just depend on income but a variety of other factors.
Chapter 3 of the World Bank Handbook on Poverty and Inequality: Poverty Lines
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Chapter 4 of the World Bank Handbook on Poverty and Inequality: Measures of
Low-Income Lines, 2013-2014
Class 2 – Measuring Poverty
Recap of Amartya Sen’s Inequality Reexamined:
Two central issues for analyzing inequality:
1) Why equality
2) Equality of what
Can we answer the first question without addressing the second? Not really..
By asking ‘What Equality’ we’re really asking about the space of our analysis
i.e. liberty, rights, utilities, etc.
By asking ‘Why Equality’ we’re asking about the reason for which we are
studying equality (or inequality) of this space
Libertarians – equality of rights
Utilitarians – equality of utility
Socialists – equality of material goods
Bottom line – any ethical system with a hope of being convincing has equality as a
starting place
Some reasons we might want to care about inequality:
1. A rising tide isn’t lifting all boats
2. The death of the American Dream – rising inequality could lead to less social
mobility and unequal access to opportunity
3. Political problems – concentration of wealth in fewer hands could lead to a
distorted political system
It is hard to study inequality without understanding measures of poverty
Basically we come up with an income cut-off (a poverty line) and anyone
with an income below it is considered poor
The cost of basic needs approach – estimates the total cost to obtain enough food
for adequate nutrition, clothing, and shelter
The food energy intake method – plots expenditure or income per capita against
food consumption to determine the expenditure level at which point a household
acquires enough food
The subjective poverty line – based on survey questionnaires that ask people
what they believe is the minimum income level required to ‘make ends meet’
Cost of basic needs approach (from Ravaillion, 1998)
zi = e(p, x, uz)
e( ) = expenditure on consumption ($)
uz = utility level (utils)
p = prices ($)
x = household characteristics
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The main flaw with this approach is that it’s impossible to measure utility, and it’s
difficult to measure expenditure on consumption
Constructing a poverty line in the real world – there are two approaches:
1) Compute a poverty line for each household, taking in to account the prices
faced and characteristics of each specific household, and thus obtaining one
poverty line for each household
2) Construct a single per-capita poverty line, but adjust per capita
expenditure/income for differences in prices and household composition
(more common approach)
Relative poverty – a distributional concept i.e. the bottom 10% or 20%. This will
yield different monetary values that distinguish between poor and non-poor based
on the distribution of income
Absolute poverty – represents the same purchasing power in every year, but it may
differ from country to country
Is required in order to track trends in poverty over time (and evaluate
antipoverty policies)
In addition, absolute poverty lines must be used in order to compare poverty
rates across countries
In the United States – the US poverty line (computed in 1963/4)
1. Compute the cost of an adequate amount of food intake to obtain the food
component of the poverty line
2. Multiply this number by 3 (at the time, food was approx. 1/3 of total
This forms the basis of the US poverty line or ‘absolute poverty threshold’ and is still
used today, but updated to reflect changing prices
In Canada – no official poverty line, instead use low income cut-offs
Low Income Cut-Offs (LICO) – income thresholds below which a family will likely
devote a larger share of its income on the necessities of food, shelter, and clothing
than the average family
Pre-tax (total) income – income from all sources (including transfers) but before
taxes have been deducted
Market income – the sum of earnings from employment or net self-employment,
net investment income, private retirement income, and anything else covered under
‘other income’
After-tax income – total income less income tax
Family income – the income of two or more people who live together and are either
married or living under common law, or anyone living together who is related by
blood or adoption
Household income – a person or group of persons who live together in a dwelling
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