module 7 Flashcards
what is economic growth
the growth rate of the real per capita GDP
what can GDP also be called a measure of
- average real per capita income
- since a way to measure GDP was by calculating total income
- so GDP is also a measure of total income
how do you determine who to put in which quintile
depends on the variable you want to compare the people by
what does the lowest quintile represent
20% of the population with the smallest values
what does the highest quintile represent
20% of the population with the highest values
if you had data of age and expenditure for each person, how do you construct the quintiles if they are based on the age variable
- sort the people by age (youngest to oldest)
- divide them into 5 equal groups
if you had data of age and expenditure for each person, how do you construct the quintiles if they are based on the expenditure variable
- sort the people by expenditure (least to most)
- divide them into 5 equal groups
what are deciles
- when you divide the population by 10 equal groups
- Ex. bottom income decile = 10% of the population with the lowest incomes
what are percentiles
- when you divide the population by 100 equal groups
- Ex. top percentile is the 1% of the population with the highest incomes
what is one way to analyze the income distribution
divide the population in quintiles based on income
how can you get a better picture of how total income is allocated in the population
- create a histogram of income
- if its skewed (especially to the right), then it means there is income inequality
why is looking at household income distribution still not perfect
because not all households are the same size
why would it be better to look at household income distribution than the distribution of income for each individual that is of working age
- some of the low income individuals are students that only work a few hours per year
- some are members of high income families who choose to be out of the labour force
- its better because it includes the income of all members of the household
what does it mean if the difference between the average and median is increasing
means that the allocation is becoming more unequal
what is the median
- the value that separates the population into 2 equal groups
- 50% of the population have incomes higher than the median, and 50% have incomes lower than the median
why are the averages higher than the medians (usually)
because many individuals have very high incomes compared with the average Canadians
what happens to the average and median if the income of the richest individuals increase
- the average increases
- the median remains unaffected
how do you plot the lorenz curve
- first need the share of total income by quintile
- then need the cumulative share of household income:
- Its the share of income of the 1st quintile (20% poorest), first 2 quintiles (40% poorest), first 3 (60% poorest), etc.
- Because of rounding errors, the last value doesn’t equal 100% (but around 100%)
- then plot the cumulative income share on the y axis and the cumulative households on the x axis
what is the gini coefficient
a measure based on the Lorenz curve
how do you calculate the gini coefficient
- the area between the perfect equality line and the Lorenz curve divided by the area below the equality line
- Since the perfect equality line has a slope of 1, the base (run) = 1 (100%), and the height (rise) = 1 (100%)
- The line makes a right angle triangle with the axes, so the area under the line is 0.5 (bh / 2 = (1)(1) / 2 = 0.5)
- So the Gini coefficient is x2 the area between the equality line and the Lorenz curve
how do you interpret the gini coefficient
- If the Lorenz curve = the equality line, the coefficient = 0
- higher coefficient = allocation is more unequal
is the gini coefficient a perfect measure of income inequality
- no
- can’t expect one number to provide a complete picture of income allocation
- Its a tool to compare inequalities, but doesn’t tell us everything about income distribution
can you compare inequality across countries with the gini coefficient
yes but it has to come from the same source
when is a household considered poor
if its income falls below the poverty line
what are 2 measures of poverty statistics canada uses
the market basket measure & the low income measure
what is the market basket measure (MBM)
- The cost of a specific basket of goods and services representing a modest, basic standard of living
- Includes the cost of food, clothing, shelter, transportation, and other items for a reference family
how do you measure if a family is in poverty or not with the MBM
- compare the MBM costs to the disposable income of families to determine if they fall below the poverty line or not
- If a family can’t afford the “modest and basic standard of living”, then they are considered under the poverty line
what is the low income measure (LIM)
Equal to half of the adjusted median household income (adjusted for household size)
does poverty need to be related to inequality
- no
- Ex. Everyone can be poor, so there would be no inequality
- Ex. the poorest person can afford the MBM, so no one is below the poverty line
- But there can still be a large portion of the population that is much richer than the others
- Treat poverty and inequality as 2 different issues that may or may not be related
is there a relationship between real per capita GDP and inequality
- We observe a negative relationship between the two, which means that richer countries are more equal on average
- But this is only true on average since there is a lot of variation
- Ex. the US is more unequal on average, even if its one of the richest countries
is there a relationship between inequality and poverty
- a weak one that shows that there are fewer poor in more equal countries on average
- but the relationship isn’t true for many countries
can growth resolve poverty
- if it can, then government policies that promote growth should also help reduce poverty
- there is a relationship for the bottom 10% of the income distribution that the higher GDP = higher average income
what is the relationship between poverty and real per capita GDP using the proportion of the population below the poverty line
- on average, the proportion of the population below the poverty line is lower for countries with higher real per capita GDP
- but there is quite a bit of variation
- the variation gets smaller as the average income increases
- This means that the number of countries with the same average income and very different proportion of the poor gets smaller
- The result does suggest that as real per capita GDP increases, the proportion of the poor becomes low and stable
what are some sources of inequality
- inequality in skills
- inequality in how skills are valued
- inequality in education
- technological advances
- value of education
what is the inequality of skills
- If there is a particular skill that is highly in demand, those who have it would be paid better than the average workers
- Ex. skilled hockey players are drafted by teams from the NHL and will be paid much more than average hockey players
- Ex. those with coding skills are in high demand, and will be paid much better than unskilled workers
- This is a natural source of inequality that can’t really be controlled
what is the inequality in how skills are valued
- Depending on how society values products and services, some skills may result in higher income than others
- Also depends on the demand and supply of those skills
- If a skill is in high demand and more valued, it will be more valued
what is the inequality in education
- Assumed that higher education = higher income
- More educated workers earn more
- So inequality of education is likely to create income inequality
- Education inequality across countries is also a source of income inequality in the world
- So government policies that focus on reducing education inequality are likely to also reduce income inequality
how does technological advances create inequality
- Related to skills and education
- Ex. advances in information technology increase the value of computer scientists without affecting the value of unskilled workers or other types of unrelated skilled workers
how does the value of education affect inequality
- Everything that affects the value of being educated will increase the impact of education inequality on income inequality
- Ex. technological advances affect the value of some types of education
what are possible channels of inequality that may have an effect of growth
- Investment: Affects growth through its impact on the accumulation of capital goods (goods used to produce)
- Education: Affects the productivity of workers
- Taxation (for redistribution purposes): Effects incentives to work or produce
- Political stability: Affects the incentive to invest
- Level of criminality: Implies wasting resources to prevent it instead of producing goods
in terms of mobility, which quintile does someone’s parents need to be in for them to have an almost equal change to be in any quintile
3rd
what is a main advantage of living in a highly mobile economy
that everyone has an equal chance of being successful
what would happen if there isnt mobility
poor families would remain poor for generations
what are 2 important factors that affect mobility
- accessibility of education
- accessibility of healthcare
how does the accessibility of education affect mobility
Children whose parents are poor have more chances to be in higher deciles if education is easily accessible
how does the accessibility of health care affect mobility
- Health has an impact on school performance
- Having an accessible health system helps poor children to acquire a higher lev
