ECON 101 Study Guide - Midterm Guide: Nepotism, Capital Account, Gini Coefficient
26 May 2018
School
Department
Course
Professor
Economics 101
Lori Leachman
Section 4 Complete Material
• Rich vs Poor Country
o Poor Country
▪ Low per capita income (less than $1100 / year; around two dollars a day)
▪ Low literacy rate
▪ High infant mortality
▪ Low trade / GDP ratio (not open to trade and/or not competitive)
▪ Large agriculture sector
▪ Limited manufacturing
• Manufacturing - value-added (adding value by processing); skill accumulation
& charge higher prices
• Move away from agriculture and manufacturing
• Usually starts with protectionism (to build capital and later open up to trade), but
never actually opens up (doesn’t want to give up protectionism)
▪ More labor than capital
o Industrialized Country
▪ High per capita income (more than 33k / year)
▪ Lots of capital & human capital - very skill & tech based economy
• Diversified beyond agriculture and even manufacturing to design service &
creative good productions (ex. engineering, accounting... etc)
• High skilled/high value-added output
▪ High literacy rates - universal education
▪ Low infant mortality - quality health care & nutrition
• Demographic structure - poor countries have large populations of young people
• Other statistics
o Richest 3 men have wealth equal to 600 million people
o Richest 20% income is 75x the bottom 20% (30 years ago it was 30 - 1)
• Measure income inequality
o Gini Coefficient where G = 0 means total equality and G = 1 means one person owns all wealth
o Global Gini = 0.65 - 0.68 and falling
▪ Falling due to growth in China and possibly India; due to urbanization
o US Gini = 0.42 (very unequal) and rising; other countries lower Gini’s (social safety net... etc)
• U.S. & Industrialized countries rising Gini
o Tax law (increase profitability to firms; firm ownership is concentrated) - decrease progressivity
o Rise in finance in total GDP (rich get deeply rich)
o Lack of free education - expensive college/university
o Decline in manufacturing/blue-collar work (used to be ticket to middle class); deindustrialization
▪ Losing a mechanism to achieve social mobility
o Decline in unionization - decline in manufacturing and power of labor
o Rising industry concentration - lot of power in the firm and away from worker (countered by
shrinking union) - leads to lower wages, incomplete benefit packages... etc
• How to promote growth
o For everyone
▪ Government reform: better governance & institutions
• Independent Central Bank (divorces monetary from fiscal policy)
o Monetary policy disciplines fiscal policy
• Free & independent press - getting solid information - fifth estate
• Independent & well staff legitimate judiciary
• Bureaucracy based on merit - meritocracy - combat nepotism
• Democracy - provided another check on government
• Separation of Executive and Legislative branches of government - checks
• Property rights reform - move to private property - cost & reward
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