Chapter 12 Inequality and Poverty

Question 1

Define equity

Answer 1

The concept of fairness.

Question 2

What is a quintile, a decile, and a quartile?

Answer 2

Quintile: 20%
Decile: 10%
Quartile: 25%

Question 3

What is the effect of higher % share of income received by the poorest quintile and lower % share of income received by the richest quintile on income distribution?

Answer 3

Income distribution becomes more equal

Question 4

Define Gini coefficient

Answer 4

An index that measures the ratio of the area between a Lorenz curve and the line of absolute equality to the total area under the line of absolute equality. The higher the figure, the more unequal is the distribution.

Question 5

Define poverty

Answer 5

An inability to satisfy minimal consumption needs

Question 6

Define poverty

Answer 6

An inability to satisfy minimal consumption needs

Question 7

Define absolute poverty

Answer 7

An inability for an individual or a household to satisfy basic human needs due to extreme lack of income

Question 8

Define extreme poverty

Answer 8

Living on less than USD$1.90 per day

Question 9

Define relative poverty

Answer 9

A concept that compares the income of individuals or households in a society with median incomes. (A person is said to be in relative poverty if his/her income is under the median income of the society.)

Question 10

Define multidimensional poverty index (MPI)

Answer 10

An index that measure poverty in three dimensions: education, health and living standards

Question 11

State the difficulties in measuring poverty

Answer 11

• poverty has different definitions and different approaches to measurement
• measurement problems, e.g. income measure of poverty do not take wealth or savings into consideration
• Overestimation and underestimation of the national poverty line

Question 12

State the effects of income and wealth inequality on economic growth, living standards and social stability

Answer 12

• Lower economic growth
  o Low income -> Low labour productivity
  o Policies favour rich people -> Further inequality
  o Poor people are unable to obtain credit and borrow money for investment/education/health -> productivity deceases
• Living standards
  o Lower consumption
  o Lack of education and healthcare services
  o Higher crime rates
• Social stability
  o Higher crime rates

Question 13

State the disincentive effects of taxation

i.e. what happens when the tax rate is too high

Answer 13

Individuals
- Labour incentive to work decreases
- Lower disposable income -> less investments and savings

Firms
- lower after-tax profit -> incentive to invest decreases

Economic growth decreases (since AD decreases due to the decrease in C and I)

Lower incentives to buy real estate and land