Inequality

Question 1

Anonymity principle

Answer 1

It does not matter who is earning the income. Everyone is treated the same way

Question 2

Population principle

Answer 2

Care about the different people living on each side of the income distribution.

Inequality measures should be independent of the size of the economy

Question 3

Four criterias in Inequality measure

Answer 3

1. Anonymity principle
2. Popoulation principle
3. Relative income principle
4. Dalton principle

Question 4

Relative income principle

Answer 4

Income is calculated relatively, not in absoulte terms. (1000, 2000) is the same inequality as (2000, 4000).

Question 5

Dalton principle

Answer 5

Regressive transfer, transfer from the lowest to the richest earners (Reversed Robin Hood), will increase inequality.

Question 6

5 measurements of inequality

Answer 6

1. Lorentz curve
2. Coefficient of variation
3. Gini Coefficient
4. The Theil Entropy Index
5. Income shares and Kuznets ratios

Question 7

Lorentz curve

Answer 7

The convex curve.

Fullfills principle 1-3, not the forth.

Question 8

Coefficient of variation

Answer 8

Spread ex. standarddeviation

Question 9

Gini Coefficient

Answer 9

The area over the Lorentz curve, but under the total equality curve.

Useful to compare between countries

1= max inequality

Question 10

Theil Entropy Index

Answer 10

A measure of variance. The higher it is the more inequality we have.

Not scaled –> difficult to compare

Question 11

Income shares and Kuznets ratios

Answer 11

An inverted U-shaped curve, measuring the relationship between inequality and income per capita. Where inequality increases to a certain point where it thereafter decreases again.

The proportion of income held by the top 10% and bottom 10%

Does not satisfy most of the criteria that we’ve gone through

Question 12

Decomposibilty

Answer 12

Break the population into subgroups. Calculate their inequalities and add them together.

Can be done in Theil measure

Question 13

Growth impact on inequality

Answer 13

Growth has no impact on inequality- it impacts the highest income as well as the lowest. This is a result of countries initial inequality.

Question 14

Inequality impact on growth: Aggregate savings and growth

Answer 14

1) people with high income will save/invest more –> the country will grow faster –> the inequality between the country and other countries grow.

– Often not true, rich people do not save more than poor people.

Solow-curve: savings=investment (closed economy)

Question 15

Inequality impact on growth: Market failures

Answer 15

2) Markets failure- effciency (growth) can be improved if resources are distributed to those who use them most effciently.

Richer people should be given resources since they have higher education ex. Since they maybe use the resources more efficiently. Ex create cooperatives (add farms together) to get economies of scale.

Inverse agricultural rule: The more land you have the more productive you are.

Law of diminishing returns - more land will decrease the effiency.

Question 16

Law of diminishing returns

Answer 16

More land owned will decrease the efficiency. (Market failure)

Question 17

Inverse agricultural rule

Answer 17

The more land you have the more productive you are.

Question 18

Inequality impact on growth: Social and political instability

Answer 18

Positive relationship: Inequality creates differences between groups → animosity → conflict, discrimination, lower social capital.

Nigeria oil, South Sudan etc. Inequality in redistribution. Global financial crises. Iran.

→ lack in trust → less growth

Question 19

Polarization

Answer 19

Differences i society ex. social inequality

Question 20

Fractionalization

Answer 20

A type of polarization, segregration.

In-groups and out-groups based on social identity

Question 21

Inequality impact on growth: Political Economy and Fiscal Policy

Answer 21

More inequality → the median voter is poorer → redistribution taxes → inefficiencies (economic), or reduction of poverty → can increase growth in part.

Prospect of upward mobility - Poorer want less taxes if they get richer in the future

Question 22

The prospect of upward mobility

Answer 22

4. Political Economy and Fiscal Policy

When you have inequality and a lot of poor people. The people that are the most against redistribution taxes are the poorest, they don’t want to have taxes if they get richer in the future.

Republican have lower incomes in general, and want less tax.

Question 23

The prospect of upward mobility

Answer 23

4. Political Economy and Fiscal Policy

When you have inequality and a lot of poor people. The people that are the most against redistribution taxes are the poorest, they don’t want to have taxes if they get richer in the future.
Republican have lower incomes in general, and want less tax.

Question 24

Median voter theory

Answer 24

To win an election you need the majority. The party that wins is the one that appeals to the average person.

Question 25

Dead weight loss

Answer 25

Inefficiency

Question 26

Taxes effect on growth

Answer 26

Can lead to dead weight loss

Can reduce poverty

Overall effect on growth is uncertain

Question 27

Democrisation on inequality

Answer 27

4. Political economy and fiscal policy

May harm inequality through The prospect of upward mobility.

High social mobility and tax policy sticky → poor don’t support high taxes bc future opportunities

Question 28

Inequality on power

Answer 28

Inequality → concentration of power in rich elites → use state for their advantage→ decreasing growth

Question 29

Inequality on growth: Access to financial capital

Answer 29

High inequality → rich hold most of the capital →
diffcult for poor to get access to credit →poor cant invest in potential business → Reduces growth

Question 30

Inequality on growth: Education

Answer 30

poor people can invest less → lower levels of education → more income inequality → lower human capital accumulation → less economic growth

Human capital: cannot be transferred.

Question 31

Inequlity on growth: incentives

Answer 31

Inequality → resentment and feeling of unfairness → reduces productivity → reduces growth

Question 32

Inequality on growth: Domestic Market size

Answer 32

Inequality → reduces potential domestic consumer market → reduce demand

Question 33

Why does inequality exist within a country?

Answer 33

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

Question 34

Why does the degree of income inequality vary across countries?

Answer 34

1. Differences in the distribution
2. Differences in the returns
3. Norms, the value society places on helping the poor.

Question 35

How does rate of return to capital and growth correlate?

Answer 35

return > growth → higher inequality

The interest rate of capital is higher than the income growing → people that already have wealth will have a continous growth in it that is higher than peoples income growth.

Wealth inequality is always higher than income inequality. Due to accumulation of wealth over time, goes on to children etc. → wealth inequality will be sustained. This will however always have some mobility due to shocks.

Question 36

Collectivist

Answer 36

Collectivist societies value reduction in inequality

Question 37

Policies agains inequality

Answer 37

Education subsidies can raise poor households’ income and the opportunity cost of children.

Taxes - redistribution

Social Security

Afordable education and health care.