Inequality

Question 1

Anonymity principle

Answer 1

Individual A has x, B has y

Individual A has y, Bas has x

Question 2

Population principle

Answer 2

population size does not matter

Question 3

Four criteria in total

Answer 3

Anonymity principle
Population principle
Scale independence principle
Dalton principle

Question 4

Scale independence principle

Answer 4

A has 1000$, B 2000$
A has 2000$, B 4000$
(Allows comparison between countries with differing average incomes)

Question 5

Dalton principle

Answer 5

Regressive transfer: transfer from a poor to rich: to go from distribution A to distribution B by a sequence of regressive transfers: A more equal than B? Useful to rank distributions

Question 6

Measures of inequality? 1st idea

Answer 6

Ratio of top 20% to bottom 40%

Question 7

Head Count Index

Answer 7

Proportion of individuals living under the poverty line:

Question 8

HCI=H/N

Answer 8

H: number of people under the absolute poverty line Yp
N: population

Measure of extent of absolute poverty

Question 9

Limitations of head count index?

Answer 9

Need to agree in a poverty line

Ignores depth of poverty

Question 10

Definition of Poverty Gap

Answer 10

The amount of money needed to bring everyone below the poverty line up the poverty line

Question 11

Total Poverty Gap (TPG)

Answer 11

Sum of (Yp-Y1)

Yp= absolute poverty line
Yi=income of person i

Question 12

Average Poverty Gap

Answer 12

APG = TPG/N

where N is population

Question 13

Normalised Poverty Gap

NPG

Answer 13

NPG= APG/Yp

Where Yp is absolute poverty line and APG is average poverty gap

Question 14

Kuznets inverted U-curve

Answer 14

Inequality will worsen before improving

REJECTED when not looking at Latin America

Question 15

Savings theory

Answer 15

Low Y (income): subsistence: savings are low

Middle income Y: aspiration: savings are high

High income: high consumption: savings are low

Question 16

Implications of savings theory?

Answer 16

Equal society will lead to many middle income people, thus savings are high and income becomes high (equal=>many middle=> s high => Y high)

Unequal society will lead to many rich AND poor, savings are low, income is low (unequal => many rich AND poor => savings low => income low)

Question 17

Further implications?

Answer 17

Increase in inequality => decrease in income

Redistribution could affect savings.

Unequal = many rich, few middle, many poor: redistribution => increased savings => increase income

Equal: redistribution may decrease savings rate + decrease income!

Question 18

Theory 2: Political Model

Answer 18

• Sees inequality as leading to a political demand for redistribution (tax, reform)
• But redistribution is often difficult because:
• elected officials are rich and can influence the votes
• requires precise data on who owns assets
• YET IF political will, government may tax profits which will reduce incentives to invest (now they would rather consume than invest) and thereby also Y (income)

Thus: DECREASE in inequality leads to DECREASE in income

Question 19

Theory 3: Capital Markets

Answer 19

INCREASE in inequality leads to DECREASE in income

disrupts poor from collateral to have access to credit, inhibits further growth

Question 20

Ethno-linguistic fragmentation

Answer 20

Ethnic divisions: the groups in power will pursue policies that benefit them, not society at large
- Will make it difficult to agree on public goods like infrastructure etc.

Study: found a negative correlation between a high ETHNIC (diversity) and a low GDP