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Chapter 19

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Department
Economics
Course
Economics 1021A/B
Professor
Prof
Semester
Fall

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CHAPTER 19: ECONOMIC INEQUALITY Measuring Economic Inequality Market income: the wages, interest, rent, and profit earned in factor markets before paying income taxes Total income: market income plus cash payments to households by gov’ts After-tax income: total income minus tax payments by households to gov’ts The Distribution of Income - in a bell-shaped distribution the mean, median, and mode are the same - it measures the percentage of total income received by each given percentage of households - they are reported in 5 groups, or quintiles, each consisting of 20% of households - another name for this is the Lorenz Curve The Income Lorenz Curve - graphs the cumulative percentage of income(y axis) against the cumulative percentage of households(x axis) - provides a direct visual clue about the degree of income inequality by comparing it with the line of equality (45 degree line) which is what the Lorenz curve would be if everyone had the same level of income - the closer it is to the line of equality, the more equal is the distribution of income The Distribution of Wealth Wealth: the value of the things that it owns at a point in time. Income is the amount of time that the households receives over a given period of time - wealth is much more unequally distributed than income - it is a stock of assets, and income is the flow of earnings that results from the stock of wealth - it is more unequal because the wealth data do not include the value of human capital, while the income data measure income from all wealth, including human capital - because the national survey of wealth excludes human capital, the income distribution is a more accurate measure of economic inequality than the wealth distribution Trends in Inequality Gini Ratio: the ratio of the area between the line of equality and the Lorenz curve to the entire area beneath the line of equality - the larger the Gini ratio, the greater is the degree of income inequality - if it is equally distributed the Lorenz curve is the same as the line of equality, so the Gini ratio is 0 - if one person has all the income and everyone else has non, the Gini ratio is 1 Poverty Poverty: a state in which a family’s income is too low to be able to buy the quantities of food, shelter, and clothing that are deemed necessary Low-income cut-off: the income level below which a family normally spends 63.6% of its income on food, shelter, and clothing NITThe lim is most commonly used low income measure. It explicitly defines low income as being much worse off than average, and it is calculated at one half the median income of an equivalent household.Why not just use absolute income?80 percent of the world pop live on less than 10 dollars a daythe average Canadian has 164 dollars a day 2 - by inspecting the income distribution data for every country, you can compare the degree of income inequality and identify the countries with the most inequality and those with the least - the global distribution of income is much more unequal than the distribution within any one country - many countries are in a pre-industrial stage of economic development and are poor, while industrial countries are rich World Gini Ratio - can compare world inequality with Canadian inequality by comparing Gini ratios Canadian Gini Ratio= 0.45 World Gini Ratio= 0.65 -the gap between rich and poor in widening within countries but narrowing across countries The Sources of Inequality 1. Human Capital - more
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