inequality and measures of development Flashcards
what is income?
- flow measured over a given period of time
- for example at the end of the year how much income was earned
what is wealth?
stock concept, measured at a given point in time, value of assets
what are assets?
- assets are anything with market value that can generate income
- can be bought and sold
- e.g stocks, shares, govt bonds
why is wealth and income linked?
- high incomes can be used to purchase assets which generate more income
- surplus incomes can again be used to purchase assets
- so the two are linked
- if youre wealthy youre going to have a relatively high income
recall the reasons for differentials in income and wealth?
age
difference between education
ownership of financial assets
ownership of property
wage differentials
why is age a reason for differentials in income and wealth?
- they have more skills meaning that theyre more productive because their experience is greater (higher marginal revenue productivity, MRP)
- therefore they can demand higher wages
- their wealth accumulation can also be greater
why are differences in education a reason for differentials in income and wealth?
the more qualifications someone has, the greater the earning potential of that individual is likely to be compared to those who dont
why does ownership of financial assets cause differentials in income and wealth?
- those who can purchase financial assets such as shares, pensions, govt bonds, derivatives are going to be more better off than those who dont
- unequal distribution of wealth
- employer also has a role → the stronger the employer, the more likely that the employer is going to give individual workers access to good pension schemes
why does ownership of property cause differentials in income and wealth?
- going to be more wealthy overtime as these prices go up
- lead to uneven distribution of wealth between those who cant afford to buy property and those who can
- often these are inherited if relatives pass away
why do wage differentials cause differentials in income and wealth?
- differences between wages for different professions
- the greater the wage differential, the greater the inequality in the distribution of income is going to be
- this is why the state provides benefits or minimum wages to close this gap
recall the measures of income inequality
gini coefficient
lorenz curve
what is the gini coefficient- what is the equation for it?
- gini coefficient → mathematical indicator
- takes what the lorenz curve shows visually and given a number for that
gini coefficient matches how much distance there is between the lorenz curve and the line of perfect equality compared to how much distance there could be
section A- in between lorenz curve and line of perfect equality
section B- area under lorenz curve
- takes what the lorenz curve shows visually and given a number for that
how do you construct a lorenz curve- draw an example of one?
- y axis- cumulative percent of income
- x axis- cumulative percent of population
(cumulative means up to and including)
e.g the 50th percent of the population includes the 49 that came before it - linear line represent line of perfect equality
how do you construct a lorenz curve- draw an example of one?
- y axis- cumulative percent of income
- x axis- cumulative percent of population
(cumulative means up to and including)
e.g the 50th percent of the population includes the 49 that came before it - linear line represent line of perfect equality
what is the lorenz curve used for?
- used to compare what actual distribution of income is like compared to the line of perfect equality
- the closer the lorenz curve is to the line of perfect equality, the more equal the distribution of income is and vice versa
the further you draw the lorenz curve from the line of perfect equality the more that total income is being held by a small proportion of the richest in society
how do you construct a lorenz curve- draw an example of one?
- y axis- cumulative percent of income
- x axis- cumulative percent of population
(cumulative means up to and including)
e.g the 50th percent of the population includes the 49 that came before it - linear line represent line of perfect equality
how does the gini coefficient work
- section B is the total area beneath the lorenz curve
- therefore section A + B is the total area beneath the line of perfect equality
- the number given when you work out the gini coefficient is between 0 and 1
what does it mean if the number given for the gini coefficient is 0?
- 0 is perfect equality → lorenz curve is the line of perfect equality
- there is no distance/area between the lorenz curve and the line of perfect equality in this case
- meaning that section A is 0
what does it mean if the number given for the gini coefficient is 1?
- 1 is perfect inequality
- this means that the last person in society is earning all of the income
- this means theres no section B
- there is only a distance between the line of perfect equality and the lorenz curve
what does it mean if the gini coefficient value is closer to 0?
- never see the extremes
- the more closer to 0 the more equal the distribution of income
what does it mean if the gini coefficient is closer to 1?
the more closer to 1, the more unequal the distribution of income
what can the gini coefficient be used for
can use this to show the effectiveness of govt policies to help redistribute income
why does a capitalist economy lead to income inequality?
because of wage differentials
Wages vary as they are based on demand and supply, and demand and supply vary for different jobs
Individuals also own resources and thus wealth differs based on the assets they own
what is the impact of economic change and development on inequality and how can this be shown?
- as a country develops and its GDP grows, inequality initially increases and decreases
- a Kuznets curve can be used to show this
what is MRP? How is it calculated
Is the marginal revenue created due to an addition of one unit of resource
It is calculated by multiplying the MPP of the resource by the marginal revenue regenerated
why does higher MPP and value lead to a higher MRP?
- increases the demand for labour
- increases their wages relative to those working in agriculture with a lower MRP
- however this rise in inequality of income allows the use of a more progressive tax
why does inequality start to decrease after a certain point when theres economic growth?
- perhaps because govt has more resources to redistribute income through taxes and benefits
- as income tax is the main source of tax revenue, the increase in tax revenue can be used to support those on lower incomes and invest in supply side policies to increase the flexibility of labour and meet the demand for labour
recall the components of HDI
education
life expectancy
standard of living
what does the education component of HDI measure?`
combines statistics of the mean number of years of schooling and the expected years of schooling
what does the life expectancy component of HDI measure?
uses a life expectancy range of 25 to 85 years
what does the standard of living component of HDI measure?
- measures GNI adjusted to PPP per capita
- GDP was used instead of GNI but to account for remittances and foreign aid NI is now used as it reflects average income per person
what does HDI measure?
it measures economic and social welfare of countries over time
what does a HDI value close to 1 indicate?
indicates high levels of economic development
what does a HDI value close to 0 indicate?
indicates a low level of development
what are the advantages of using HDI to compare levels of development over time?
- does allow for comparisons between countries to be made based upon which countries are generally more developed than others (easy to compare)
- provides a much broader comparison between countries than GDP does
- education and health are important development factors
why are education and health important development factors?
can provide information about the country’s infrastructure and opportunities
- also shows how successful govt policies have been
what are the limitations of using HDI to compare levels of development over time?
- doesn’t consider quality of factors e.g how free people are politically, human rights, gender equality or peoples cultural identity
- doesn’t take the environment into account
- doesnt consider the distribution of income
- a country could have a high HDI and be very unequal
- meaning that many people might still be in poverty
ignores crime
excludes technological development which can contribute to peoples lives positively
what other indicators of development are there?
HPI- human poverty index
GDI- gender related development index
inequality adjusted HDI
multidimensional poverty index
what does HPI 1 measure?
- measures poverty in developing countries
- the longevity part o the index measures the probability of living to the age of 40
- education component considers the adult literacy rate
- the ability of citizens to meet basic needs is measured by the percentage of underweight children and the percentage of people not using improved water sources
what does HPI 2 measure?
- measures poverty in developed countries
- the probability of not surviving to at least the age of 60 is used
- the percentage of adults who dont have literacy skills is calculated
- poverty is calculated by those living below the poverty line which is below 50% of median income
what does the GDI measure?
- gender-related development index (GDI)- measures the relative inequality between men and women
- combines HDI with a consideration of gender
- e.g will consider the differences in life expectancies, income, education between genders
what could inequality cause
external costs - rising spending on policies and more spending on insurance and security services
poorer families have limited access to healthcare and education which are merit goods
volatile income can lead to high debts with high interest rates
capital investment and production is steered towards meeting the preferences of the rich
what does the multidimensional poverty index measure
reflects number of deprivations faced by households
