3 - Inequality and Development

Question 1

4 principles for being a good measure of inequality:

Answer 1

1. Anonymity principle - it doesn’t matter who is earning the income.
2. Population principle - how many people living in the country is irrelevant, it is the percentage of the pop earning the different levels of income that matters.
3. Relative income principle - don’t measure the absolute amount of money but the relative. Inequality in a poor country can be same as in a rich, measure differences within country.
4. Dalton principle - A regressive transfer lead to an increase in ineq. The rich takes from the poor.

Question 2

Is Dalton principle valid the other way around?

Answer 2

No, Dalton isn’t valid for progressive transfers, i.e when rich gives to the poor, the inequality will not decrease.

Question 3

5 measures of inequality:

Answer 3

1. The Lorenz Curve
2. Coefficient of Variation
3. The GIni Coefficient
4. The Theil Entropy Index
5. Income shares and Kuznets ratios

Question 4

Lorenz curve

Answer 4

Graphs the relationship between cumulative percentage of HH (x) to the cumulative percentage of HH income (y). This is typically bent away from the 45 degree line of perfect equality. The further away, the more inequalities.

Question 5

How to do Lorenz step by step (7):

Answer 5

1. Arrange HH income from lowest to highest.
2. Calculate total income
3. Calculate the fraction of income earned by each population decile.
4. Calculate the cumulative fraction earned by the deciles.
5. Set out the perfect equality line.
6. Plot the Lorenz with the values you got. The more bowed the more unequal.
7. The Gini coefficient is the area between the Lorenz and perfect line divided by the total area under the perfect line. (Easier to compare across time and space).

Question 6

Coefficient of Variation

Answer 6

CV=sd/my

The standard deviation of expenditure divided by the average expenditure in the population.

Question 7

Gini Coefficient

Answer 7

G= A/(A+B) = (2/nu)*cov(expenditure, rank)

Sooo either we can measure from the Lorenz where we take the area of A divided by A+B. Or we divide 2 by n*mean and them multiply by the covariance between a person’s expenditure and income rank.

If G=1 we have max inequality and with G=0 there is perfect equality.

Question 8

Does Gini satisfy our four principles?

Answer 8

• Anonymity - yes
• Population - yes (if you double the population and replicate the same expenditures, you see that G remains the same)
• Relative - yes. If multiplying with some constant it should give the same result, same relative relation.
• Dalton - yes. Can also be tested by transfer money from low to high.

Question 9

Theil Index

Answer 9

A measure that runs from 0 that is perfect equality to ln(n)= max inequality.
This measurement is additively decomposable and therefore we can divide into subgroups and compare inequality between groups.

Question 10

Income shares

Answer 10

Another very common measure where we for ex calculate how much of the income that is held by the top 10% or the bottom 10%. Proportions.

Question 11

Decomposability

Answer 11

Means that you can divide the pop into subgroups and calculate inequalities within and between these groups, when adding the within and between inequalities,w e get the total of the population.

–> help us focus policies on the right type. State-level or more local interventions.

Question 12

What is Piketty’s main point about why inequalities have increased?

Answer 12

That r>g always. The return is always greater than the growth, or have almost always been at least. So the ones already owning a lot of assets, or are born rich will continue becoming even richer while the poorer have hard to reach the same speed since they have hard financing assets and earn the r.

Question 13

Piketty’s solution to inequalities:

Answer 13

Must have global taxes on capital, otherwise you can place your assets in countries with low taxes….

Question 14

Can growth create inequalities?

Answer 14

No, evidences show that on average will growth not increase/reduce inequalities. But initial inequality matters - low from beginning is good bc high ineq will grow larger with growth.

Question 15

Channels through which inequalities impact growth (8):

Answer 15

1. Aggregate saving
2. Market failures
3. Social and political instability
4. Political economy and Fiscal policy
5. Access to financial capital
6. Education
7. Incentives
8. Domestic market size

Question 16

How savings affect growth with inequalities in mind:

Answer 16

High S will make countries grow which means that inequalities can be good for growth since rate of saving is higher for rich people.

Question 17

How market failures affect growth with inequalities in mind:

Answer 17

Efficiently distributed resources good for growth, not concentrated to the most powerful persons… Equality is then better for growth. (But economies of scale can male assets be more concentrated)

Question 18

How social and political instability affect growth with inequalities in mind:

Answer 18

Inequalities create conflicts and lower social capital. Much evidence that income inequalities in correlated with conflicts.

Question 19

How political economy and fiscal policy affect growth with inequalities in mind:

Answer 19

In unequal societies, the median voter is poorer –> pressure for redistributive policies. But taxes can cause DWL but also reduce poverty so the net effect is unclear. Also, de facto political power can harm growth.

Question 20

How access to financial capital affect growth with inequalities in mind:

Answer 20

If rich holds most f the capital –> hard to get access to finance if you are poor –> reduces growth and resources are inefficiently distributed if poor cannot fulfil their entrepreneurial ideas.

Question 21

How education affects growth with inequalities in mind:

Answer 21

Unequal distribution lead to lower human capital accumulation and thus lower growth.

Question 22

How incentives affect growth with inequalities in mind:

Answer 22

Inequality can create feeling of unfairness which reduces productivity and hence growth.

Question 23

How domestic market size affect growth with inequalities in mind:

Answer 23

Inequality reduces potential consumer market in an economy and domestic market is important to drive demand and growth.

Question 24

5 reasons to why inequalities exist:

Answer 24

1. Norms
2. Human capital
3. Differences in ownership of physical capital (Piketty)
4. Fertility
5. Differences in where people live

Question 25

Why does the degree of income inequality vary across countries?

Answer 25

Because there are differences in the distribution of the five characteristics: norms, HK, ownership of K, fertility and where people live. And there are also differences in the returns of these 5.

Question 26

Norms and ineq:

Answer 26

The value that society places on helping the poor diverge across countries, collectivist societies value it higher. And also the belief in why people are poor - ex in US they believe that people are awarded for their effort so that the poor simply don’t do enough and then inequalities are OK (according to them).

Question 27

Inequalities based on luck, US vs Norway:

Answer 27

In the experiment shows that inequalities based on luck is more ok in US than in Norway, more willing to redistribute in Nor to make it more equal. This says a lot about the norms and as US have huge inequalities we can also conclude that norms matter.