Inequality Flashcards
Anonymity principle
Individual A has x, B has y
Individual A has y, Bas has x
Population principle
population size does not matter
Four criteria in total
Anonymity principle
Population principle
Scale independence principle
Dalton principle
Scale independence principle
A has 1000$, B 2000$
A has 2000$, B 4000$
(Allows comparison between countries with differing average incomes)
Dalton principle
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
Measures of inequality? 1st idea
Ratio of top 20% to bottom 40%
Head Count Index
Proportion of individuals living under the poverty line:
HCI=H/N
H: number of people under the absolute poverty line Yp
N: population
Measure of extent of absolute poverty
Limitations of head count index?
Need to agree in a poverty line
Ignores depth of poverty
Definition of Poverty Gap
The amount of money needed to bring everyone below the poverty line up the poverty line
Total Poverty Gap (TPG)
Sum of (Yp-Y1)
Yp= absolute poverty line
Yi=income of person i
Average Poverty Gap
APG = TPG/N
where N is population
Normalised Poverty Gap
NPG
NPG= APG/Yp
Where Yp is absolute poverty line and APG is average poverty gap
Kuznets inverted U-curve
Inequality will worsen before improving
REJECTED when not looking at Latin America
Savings theory
Low Y (income): subsistence: savings are low
Middle income Y: aspiration: savings are high
High income: high consumption: savings are low
Implications of savings theory?
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)
Further implications?
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!
Theory 2: Political Model
- 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
Theory 3: Capital Markets
INCREASE in inequality leads to DECREASE in income
disrupts poor from collateral to have access to credit, inhibits further growth
Ethno-linguistic fragmentation
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
