5 - Poverty, Inequality and Development Flashcards
Inequality measure
Rule which assigns degree of inequality to each income distribution
How do we describe an income distribution?
- n individuals, income of the ith individual = Yi, i=1,2,3, n
- Income distribution I, describes how much income Yi received by individual I
- I (Y1,Y2,Y3 Yn)
Anonymity Principle
- It doesn’t matter who receives the income
- unimportant whether person A receives X and B receives Y or vice versa
- Therefore can always rank income distribution such that Y1≤Y2 ≤ Y3 ≤ Yn)
- can rank from poorest to richest
- without losing valuable information
Relative Income Principle
Income levels in themselves are not important
Not absolute but rather relative incomes that matter
Shortfalls in absolute income rather addressed when studying poverty measurement
Dalton principle
If one income distribution can be achieved from another by constructing a series of regressive transfers, then the former distribution MUST be more unequal than the latter
For every income distribution I(Y1,Y2,Y3 Yn) and every transfer t>0
I(Y1, ,Yi, ,Yj, ,Yn)
Population principle
The size of the population is irrelevant
- If double the population, relative inequality remains the same
Lorenz Curve
Perfect equality - % of income = % population
Lorenz Criterion:
If Lorenz curve lies at every point to the RHS of the Lorenz curve of some other distribution, the former is more unequal than the latter
Inequality measure consistent with the Lorenz criterion ONLY if:
simultaneously satisfies 4 principles
Incorporates anonymity, population and relative principles because curve drops all information on income and population in magnitudes and retains only population shares
Mean Absolute Deviation (M):
Accounts for entire income distribution
