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Chapter 19


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ECON 1000
Sadia Mariam Malik

Unit 3: Economic Decision Making -Role of the government -Government -Redistribute Income --> Taxes, Welfare -Correct for Externalities --> Environmental acts, Smoking by laws -Maintaining Competition --> Regulation, Incentives -Legal and Social Framework --> laws, legislation, etc. -Stabilize the economy --> government spending -Provide Foods and Services --> Military, hydro, education, health care Government involvement in the Economy How did the welfare state develop? Great Depression (1930s) US -between 1929-1933 --> GDP decreases, businesses failed, banks closed, unemployment increase after stock market crash Canada -unemployment soared, GDP decreased 37 % Previous Theories “Classical Theory” - no longer useful as lowering prices, wages and interest rates did not lead to full employment John Maynard Keynes (1883-1946) -one of the first economists to propose the government had to spend its way out of the depression by hiring workers in major public work projects -Canadian economy returned to full employment (FE) Welfare State -a philosophy that the government should intervene to help people who are poor, sick, unemployed as well as provide equal access to 3 main areas (security, health & education) -major change from laissez-faire capitalism (supported by more traditional economists) -transfer payments: money given to a disadvantaged individuals and households -late 1990s, budget surplus achieved 3 main problems with Canada’s social welfare programs: 1)Minimal Incentive to work: for every extra $ welfare recipients receive, welfare benefits are reduced) 2)Inequities & Abuses 3)High Costs (can lead to budget deficits) Canada’s Social Safety net in Drug dealers, people on street who jeopardy? -the government significantly don’t pay taxes get welfare --> is it “downsized” in the 1990s -part of the government’s goals fair? included fair distribution of income -Question: would the Canadian government be able to maintain the well being of its citizens? Human Development Index (HDI) -uses education, standard of living and life expectancy to rank 175 countries in terms of “quality of life” Mean Average Salary -total income/total population - average income is also a factor used to calculate HDI (shows a family’s ability to support themselves in a comfortable lifestyle) -Problem? outliers will influence the average salary -ex. 12000, 20000, 30000, 100000 Median Average Salary Process: rank all the salaries from lowest to highest and find the middle salary ex. 30000, 40000, 50000, 70000, 80000 The Lorenz Curve -to examine income distribution economists divide Canadian income earners into 5 groups (20 % or 1/5) of total earnings --> quintile -the wider the gap the greater the inequality -the further the curve is from the complete equality line the greater the inequality Gini Coefficient -provides a clear quantitative value -value = 1 (complete inequality) -value = 0 (complete equality) -Canada - 0.321 (2005) -US - 0.45 (2007) -developed countries should have a gini coefficient between 0.24 and 0.36 Poverty -absolute poverty: state of utter destitution (ie lacking the basic necessities such as good, shelter or clothing) eg. Africa, Afghanistan -relative poverty: lacking the conditions of life enjoyed by most people in the same economy -working poor: individuals that work for low wages -welfare poor: non-working individuals who are poor because they are ill, sick, disabled, single parents, etc. Problems examples -standard of living, high cost for social programs, crime, homelessness, Measuring Poverty Where should the poverty line be set? low-income cut-off (LICO) - developed by Statistics Canada to measure household Example with low income National Average/ LICO: 35 % + 20 % -any household spending 2-% on average points more than the national average before tax and after tax on = 55 % essentials (ie. food, shelter, clothing) Salary: $ 50000 Cost of essentials: $ 30000 % of income spent: 60 % How should we address poverty? 2 Methods 1.Structural Strategies (“Treatment”) -long term remedies used to lower income disparities -ex. educational programs, retraining, self-esteem, and motivation programs 2.Relief Strategies (“Band-Aid” Solutions) -immediate remedies that are oft
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