measures of inequality 4.4.1 Flashcards
what is the visual indicator?
lorenz curve
what is the mathematical indicator
Gini coefficient
How does Lorenz curve look like?
x-axis - cumulative percentage of population
y-axis - cumulative percentage of income
draw a straight line - explains line of perfect equality=0.25
then draw a curve near the line
what is the perfect line of equality?
0.25
if the curve has a perfect distribution of income what happens?
- this explains how the first 10% of population have 10% of income it carries on. The closer the line the more equal the distribution of income and vice-versa.
if the curve has imperfect distribution of income what happens to the curve?
x-axis - cumulative % of population
y-axis - cumulative % of income
draw a line of perfect equality as normal
draw a Lorenz curve very close to the line to show there is an imperfect line of equality
so since it has imperfect equality where the poorest 20% of population and they are earning 5% of total income.
how do you calculate gini coefficient?
section A/ section A+ B
section A represents 0- perfect equality
section B represents- 1 perfect inequality
when the figure is 0 it means the Lorenz curve is the line of perfect equality i.e there is no section A
when the figure is 1 the last person in society is earning all the income
the Lorenz curve- if the curve is moving towards perfect equality what happens to the curve?
it will shift to the right
what could be other reasons there might be income inequality?
some countries have been held back by wars,droughts,famines and earthquakes. There are certain social groups that may have been excluded and marginisalised.
what about developed countries what advantage do they have?
They tend to favor each other when trading,negotiating. This helps them to develop more than countries who are not involved in the agreements.
what does the kuznet hypothesis state?
As society moves from agriculture to industry, inequality will rise because the wages of industrial workers rise faster than farmers. Therefore for it to become fair there will be taxation for inequality to decrease.
what is Piketty?
However he disagrees with Kuznets since inequality will rise more as the country develops because the rate on capital grows so the rich get richer and inequality will rise.
How does a capitalist economy works?
a capitalist economy leads to income inequality because of wage differentials, wages heavily depend on supply and demand.
describe the process of capitalist economy?
- Individuals who own resources wealth differs based on the assets they own
- it is argued that equality can never be achieved since the possibility of having more is important to encourage hard work. If the incentive is not there then people won’t work as hard or take risks.
- Inequality is essential for capitalism to work
- degree of inequality is necessary and desirable. But excessive inequality causes problems with efficiency and social justice.
Define financial markets?
where buyers and sellers can trade financial assets.
