Economics 1021A/B Study Guide - Quiz Guide: Kuznets Curve, Gini Coefficient, Human Capital
20 Jun 2020
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Political econ
The free market has the idea that inequality is an inevitable outcome of different
productivities of different people.
- This is a ‘natural order’, politicians shouldn’t make richer people pay more → ‘politics of
envy’.
- Accordingly, when the rich have more money at their disposal, they will invest more and
generate more income for others.
Too much inequality is bad for the economy; instability and reduced mobility.
- High inequality reduces social cohesion, increasing political instability, therefore reduced
investments.
o Also increases economic instability.
o Also reduces economic growth due to creating barriers to social mobility.
- Inequality leads to inferior social outcomes
o Higher inequality produces a higher number of poor people.
- If there is too little income inequality, it can discourage people form working hard or
creating new things to earn money (socialist countries are an example).
Kuznets hypothesis – as a country develops economically, inequality first increases and then
decreases.
- Famous of its inverted-U-shaped curve → Kuznets curve.
- It is a weak hypothesis.
o This is because economic policy matters so much in determining the level of
inequality.
Different types of inequality → wealth or human capital, and non-economic factors, but
these are not measurable.
- Wealth and human capital can be measured with the Gini coefficient or Palma ratio.
Absolute poverty – the failure to be in command over income to fulfil the most basic human
needs for survival.
Relative poverty - related to inequality were people live under the national poverty line.
Multidimensional poverty – people who have enough money to eat and clothe themselves,
but with little access to education and health care.
- The poverty gap is measured, b weighing each poor person by the distance he/she falls
short of the poverty line.
- Causes of poverty: structural causes together with the choices of the individual
o Inadequate childhood nutrition, lack of learning stimulus, sub-par school, etc.
o Lack of social mobility.
- Absolute poverty should be reduced without an increase in output, if there is an
appropriate redistribution of income.
- The world produces enough to eliminate absolute poverty.
Chang ch. 10
Work is very present in our lives, but only unemployment is interesting for the economy.
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Document Summary
The free market has the idea that inequality is an inevitable outcome of different productivities of different people. This is a natural order", politicians shouldn"t make richer people pay more politics of envy". Accordingly, when the rich have more money at their disposal, they will invest more and generate more income for others. Too much inequality is bad for the economy; instability and reduced mobility. High inequality reduces social cohesion, increasing political instability, therefore reduced investments: also increases economic instability, also reduces economic growth due to creating barriers to social mobility. Inequality leads to inferior social outcomes: higher inequality produces a higher number of poor people. If there is too little income inequality, it can discourage people form working hard or creating new things to earn money (socialist countries are an example). Kuznets hypothesis as a country develops economically, inequality first increases and then decreases. Famous of its inverted-u-shaped curve kuznets curve.
