Module 7 : Income Inequality

Question 1

What is the ‘distribution of income’?

Answer 1

Its how the income is divided among the country’s residents

Question 2

Why is it important to pay attention to the distributio of inomce

Answer 2

1. Due to its relationship to poverty

Question 3

If income is distributed more unequally; what happens?

Answer 3

More people will ive in poverty.

Question 4

What else is ‘distribution of income tied to’?

Answer 4

1. Its links to poverty
2. Its also tied to the process of economic growth.

Question 5

Is it good if there is a high level of inequality?

Answer 5

For an economy it can be good for growth but however bad for some stages of development and bad for growth for others

Question 6

Who is income inequality an important issue for?

Answer 6

Income inequality in a country is a more important issue for those that actually live in that country compared to others from another country
Ex. a poor person in the US cares more about the difference in economic status between them and a rich person in the US compared to those from another country that are much poorer than them
People get their happiness based on how their consumption (wealth) is compared to others instead of how much they have on its own (absolute level of consumption)

Question 7

What is income inequlity focused on?

Answer 7

how the residents of a country differ from the country’s average, and how they differ from each other

Question 8

What are the two ways we can look at income distribution?

Answer 8

First approach:
- Its to divide the population into ‘several equal groups’ and measure how much income each group earns

Second approach:
- Its to divide income into equal sized intervals and see how much of thepopulation falls into each interval

This allows us to look and compare income inequaity in a country at a single time

Question 9

How to do the ‘first approach’ of looking at income distriubtion:

Answer 9

1. Divide the household into five income quintiles as it makes up of 20% of the popualtion each going from low to high

Question 10

How to do the ‘second approach’ of looking at income distriubtion:

Answer 10

1. Divide the population into different categories of income and look at the fraction of the population that falls in each.

Question 11

What are summary statistics to describe the income distribution when calculating by frequency in an interval

Answer 11

Mean
median
mode

Question 12

What is the mode in the case of income distribution

Answer 12

1. Mode in the case of income distribution shows the highest percentages of hosueholds that fall undera category

Question 13

What are the two stast used fo summarzing the dsitrubtion of income

Answer 13

1. Mean (avrage)
2. Median (The value that has exactly as many observations above it as for below)

Question 14

what does the income distribution when calculating by frequency in an interval usually look like visually

Answer 14

have a long right tail instead of being symmetric
when mean > median

Question 15

How do we comapre income inequaltiy over time in a country or among countries?

Answer 15

Gini co-efficant

Question 16

What is the ‘gini coefficant’?

Answer 16

A single number that summarizes the degrees of income inequality in a country to compare between countries or to look at trends of inequality in a country overtime

Question 17

What do you want to do first when you want to calculate the gini coefficant

Answer 17

[Make a lorenz curve]

Question 18

How do you calculate the lorenz curve?

Answer 18

Get the data on income of all households (or a sample of them) in a given country
Arrange the households from lowest to highest income
Calculate what fraction of total income is earned by the poorest %, starting with 1%, then 2%, … all the way until 100%, where the amount of income earned by the poorest 100% of households is 100%
Graph the data

Question 19

Why is the lorenz curve more bowed out?

Answer 19

This is due to income inequality

Question 20

What happens if the lorenz curve has perfect equality?

Answer 20

It would mean income is perfectly distributed throughout the economy showing us a straight line

Ex:

when the poorest 20% of households would earn 20% of the total household income, poorest 40% would get 40% of total income, etc.
it is a straight line with a slope of 1

Question 21

When a lorenz curve is more bowed out what does that mean?

Answer 21

The more unequal income is distributed

Question 22

What is a summary on how to read the lorenz curve for income inequality?
(The properties of the lorenz curve)?

Answer 22

if its bowed shaped it means there is income inequality

if income was perfectly evenly distributed, the lorenz curve would fall on the line of perfect equality

the more bowed out the curve is, the more unequal income is distributed

Question 23

How is the lorenz curve used to construct the gini coffeicant

Answer 23

Measure the area between the Lorenz curve and the line of perfect equality

Divide the area by the total area under the line of perfect equality

Question 24

what are the properties of the Lorenz curve in relation to the Gini coefficient?

Answer 24

The more bowed out the curve, the higher the Gini coefficient

If income is perfectly distributed (Lorenz curve = line of perfect equality), Gini coefficient = 0

If income is unequally distributed as possible (if one household has all the household income in the country), then Gini coefficient = 1

Question 25

what is the kuntez curve?

Answer 25

1. a hypothesis that stated that as a country developed, inequality would first rise then fall later
2. if graphed with GDP per capita on the x axis and income inequality on the y-axis, the curve would be like a negative parabola

Question 26

How can we look at the kuntez curve?

Answer 26

1. By examining the level of inequality in a single country over time
2. By looking at a singel point in time in a cross section of coutnries with differnt levels of income

Question 27

what happens if you hold the average level of income per capita in a country constant, and there is a higher degree of income inequality

Answer 27

theres a larger difference between the rich and the poor
poor people are worse off

Question 28

if the kuznets curve exists, what would an increase in income per capita for poor countries mean

Answer 28

an increase in inequality
it would mean that economic growth could be bad for the poorest people in the country, as they would become even poorer