Economics Chapter 18 Flashcards
Inequality
3 key questions
1)How much inequality is there in our society?
2)What problems arise in measuring the amount of inequality?
3)How often do people move among income classes?
Statistics
The poorest 20% of the South African population consume less than 3% of total expenditure, while the wealthiest 20% consume 65%, according to the World Bank.
Lorenz curve
The Lorenz curve shows the relationship between the cumulative percentage of households and the cumulative percentage of income
The Gini coefficient
The Gini coefficient is a measure of the degree of inequality of income in a country
It measures the area between the 45-degree line and the Lorenz curve
A Gini coefficient of 0 means that income equality is perfect.
A Gini coefficient of 1 means that all income belongs to one household
The higher the Gini coefficient the greater the income inequality
Problems in measuring inequality
Data on income distribution is based on annual income, yet people mainly care about their ability to maintain a good living standards, give an incomplete picture of inequality in living standards because of the following:
1)The Economic Life cycle.
2)Transitory versus permanent income.
3)Economic Mobility.
The economic life cycle
The regular pattern of income variation over a person’s life is called the life cycle
To gauge the inequality of living standards in our society:
the distribution of lifetime incomes is more relevant than the distribution of annual incomes.
Unfortunately, data on lifetime incomes are not readily available
Transitory versus Permanent Income
Incomes vary because of random and transitory forces
Acts of nature.
Temporary layoffs due to illness or economic conditions
Permanent income excludes transitory changes in income.
To measure inequality of living standards, the distribution of permanent income is more relevant than the distribution of annual income
Economic Mobility
Is the movement of people among income classes
Movements up and down the income ladder can be due to:
1.Good or bad luck.
2.Hard work or laziness.
3.Persistence of economic success from generation to generation.
4.However, we do find persistently poor people in developed and developing countries
5.Policies intending to combat poverty need to cater for both temporarily and persistently poor
Reasons for Increase in Income Inequality
The following have tended to reduce the demand for unskilled labour and raise the demand for skilled labour:
1.Increases in international trade with low-wage countries
2.Changes in technology
3.Therefore, the wages of unskilled workers have fallen relative to the wages of skilled workers.
Political Philosophy Of Redistributing Income
Opinions differ.
Opinions depend on relative position
Economic analysis alone cannot give us the answer.
The question is a normative one facing policy makers.
Relative position
relative position the idea that humans view their own position against a reference point which provides a means of comparison on feelings of well-being.
Political Philosophies
1.Utilitarianism
2.Liberalism
3.Libertarianism
4.Libertarian Paternalism
Utilitarianism
Utilitarianism is the political philosophy according to which the government should choose policies to maximize the total utility of everyone in society
An extra rand of income to a poor person provides that person with more utility, or well-being, than does an extra rand to a rich person.
People with higher income pay high taxes, people with low incomes receives income transfers
Jeremy Bentham and John Stuart Mill
Liberalism
is the political philosophy according to which the government should choose policies deemed to be just, as evaluated by an impartial observer behind a “veil of ignorance” (ignorant of our stations in life).
Public policy should be based on the maximin criterion, which seeks to maximize the utility or well-being of the worst-off person in society
Transfer income from the rich to the poor
Incentive people to work less, least fortunate person might be worse off.
John Rawls
