Ch 5 - Inequality and growth

Question 1

Economic inequality is composed of ________

Answer 1

Income inequality, wealth inequality, etc…

Question 2

What is income inequality?

Answer 2

Differences in the flow of resources in the short run, It is subject to volatilities and temporary losses and gains

Question 3

What is wealth inequality?

Answer 3

Disparities in the stock of resources. Reflects the long run relative position of individuals (harder to measure)

Question 4

What are the 4 principles in the axiomatic approach to measuring inequality?

Answer 4

Anonymity principle(the identity of individuals should not impact on inequality comparisons), population principle a proportionate change in population size should not affect income inequality), relative income principle (scaling all individuals’ income by a constant should not change the level on inequality), Dalton principle (a distribution derived from another only by taking away income from the poor and giving it to the rich is more unequal)

Question 5

What does the Lorenz curve depict?

Answer 5

The Lorenz curve provides a visual representation of inequality that allows us to look at the share of income that goes to different shares of the population

Question 6

What is the Gini coefficient?

Answer 6

It is the ratio of the area between the equality line and the Lorenz curve to the area of the triangle under the equality line

Question 7

Higher Gini coefficients are an indication of _________

Answer 7

Higher level of inequality

Question 8

What is the Kuznet ratio?

Answer 8

Ratio of the share of income per x % of richest individuals to the share of income to y % of poorest individuals

Question 9

What is the inverted U hypothesis?

Answer 9

The inverted U hypothesis postulates a non linear relationship between income and inequality. It argues that the process of development is initially accompanied by rising inequality but as the economy grows compensatory factors start to reduce inequality

Question 10

How may inequality promote growth?

Answer 10

1. Poorer individuals consume a larger fraction of their income, while richer individuals save a larger proportion of their income.
2. Concentration of resources allows well endowed entrepreneurs to invest in starting new businesses that promote economic growth

Question 11

How does inequality harm development?

Answer 11

1. Raises demand for redistribution, which is likely to be funded by progressive taxation that reduces investment incentives
2. Lack of resources prevent the poor from investing in human capital