12. The Lorenz Curve Flashcards
Why do Governments redistribute income?
Governments aim for some redistribution of income in order to reduce inequalities. There are many reasons for this.
One obvious reason is moral .i.e. basic issues of fairness. This is often based on political beliefs. For example left-wing parties are often based on this as a founding principle.
How is AD affected by Inequality?
Inequality negatively affects AD.
If large sections of the economy are deprived in terms of income then they will not contributing significantly to economic growth, meaning AD is lower than it might be.
How is LRAS affected by Inequality?
It negatively affects Long Run Aggregate supply. If a large proportion of households within an economy are poor then they will perhaps be unable to take advantage of education as much.
How is SRAS affected by Inequality?
It negatively affects Short run Aggregate Supply.
This means that large numbers of employees are trapped in a low wage cycle. This creates all sorts of disincentive effects as low paid workers see little point in working to their full potential.
How does inequality affect Economic Development?
Low pay contributes to poverty. Poverty contributes to ill-health and a wide range of social ills such as crime, corruption and poor levels of adult literacy. The more unequal a society the more likely it is to be low in the HDI ranking.
What are Quantiles?
Quantiles are used to divided the population into equal sized groups each containing similar values.
What are Deciles?
Deciles divide population into 10% groupings.
What are Quintiles?
We also use quintiles- this divides the population into 20% groupings.
What does the Lorenz curve show?
The Lorenz curve is a simple way to describe income distribution using a two-dimensional graph.
What is the Gini-co-efficient?
The Gini- coefficient is widely used as a measure of inequality
The coefficient is between 0, where everyone earns the same, and 1, where one person earns all the money
Countries with high Gini- coefficients (e.g South Africa) have score like 0.65- they are highly unequal societies
Countries with low Gini- Co-efficients like Sweden have scores about 0.24
Evaluation of the Lorenz curve?
The Lorenz curve is ok but you cannot compare a wide range of countries using this method.
Gini- Co-efficient is widely used and gives excellent “big picture” information but is not great at analysing extremities of inequality.
