Review questions L3 Flashcards
- Please explain briefly, why intra-household inequality may be a source of bias in survey-based estimates of inequality and state if the bias is positive or negative.
The challenge is that measures of individual consumption based on household surveys might be biased due to difficulties knowing who consumes what. There is both a lack of gender-based consumption, as well as adult/child-based. Another aspect is, a lack of full transparency, for example if the person answering the household survey isn’t the same person who brings home the income, then there will be missing information and the survey will not be answered correctly – (typically one could imagine that the man makes the money, while the women answers the survey, then, if she isn’t properly informed, she will probably think that their income is lower than what it actually is, and underreport it). This creates a negative bias problem with intra household inequality
- Please explain how it is possible to argue that:
- Global inequality has increased from around 1980 to around 2000
- Global inequality has decreased from around 1980 to around 2000
- Global inequality has been roughly constant from around 1980 to around 2000
When considering how it is possible to argue for all three, very different cases, it is essential to reflect on the different methods and perspectives for measuring inequality.
When decomposing inequality, it becomes clear that inequality within countries has increased over the period. So while there has been a decrease in inequality between countries, it has risen within. This increase in within inequality, which Milanovic refers to a class inequality based on the Theil index, is probably mainly due the fact that the most wealthy people in each country have gotten even more wealthy, while there hasn’t been the same increase in income for the rest of the population, so the gap has gotten bigger.
- Relative measures of inequality will support this (Gini or Theil)
On the other hand, it is possible to argue that global inequality has decreased, as inequality between countries has decreased. Milanovic calls location inequality based on the Theil index. Also, when using absolute measures, which considers the difference between levels rather than proportions, global inequality may seem to have decreased.
Combining both relative and absolute measures of inequality can result in a perception that global inequality across the periods has remained roughly constant. While relative inequality (income ratios) might have increased, the absolute gain in income among the poor can offset this, making it look like the global inequality has been stable from 1980 to 2000.
- Global Inequality Increased: Supported by relative measures showing greater income disparity.
- Global Inequality Decreased: Supported by absolute measures and income convergence between countries.
- Global Inequality Constant: Supported by a combination of relative and absolute perspectives showing balanced effects.
- Please explain how income inequality may affect the accumulation of physical capital
This is based on classic theory which suggests that richer families have higher saving rates, leading to redistribution in favor of the rich, which increases savings and thereby physical capital accumulation (for the wealthy). On the other hand this type of inequality (of capital accumulation) might lead to a higher risk of violent conflicts, entailing a greater risk of destruction of physical capital. In this way inequality might lead to a decrease in physical capital.
- Please explain how income inequality may affect the accumulation of human capital
This is based on the fact that human capital is not transferable (and costly to obtain). Further, if we assume that accumulation of human capital is costly, while having capital market imperfections and/or restrictions, then poorer people will underinvest in human capital (education fx.), leading to more inequality, which is restrictive on economic growth.
Please describe the difference between absolute and relative inequality
Absolute measures of inequality considers actual differences in levels of living (wealth, income, consumption) between individuals or groups. So the focus is mainly on monetary differences. The absolute measure changes with absolute changes in income, so if all incomes are increase by a the same amount, then the inequality is unchanged.
Relative inequality measures the disparities in incomes (or consumption fx.) to proportion to the overall mean or median of income (or consumption) in the population. Thus this is expressed as a ratio or proportion. The relative inequality changes only when the proportional relationship between incomes change, so if all incomes are multiplied by a constant, then the inequality is unchanged
- Please explain how to easily test the poverty-inequality relationship. Comment on
the empirical relationship between:
a. Absolute Poverty and Absolute Inequality
b. Absolute Poverty and Relative Inequality
The poverty-inequality relationship can be tested with the Ravallion trick, where the possible correlation between poverty and inequality over time is considered. It implies defining the relative Gini as we know it (G=A/(A+B)) and the absolute Gini index as G*= relative Gini times a mean income or consumption. In this way the changes over time in both measures of poverty and inequality is measured: change in relative poverty is measured by changes in the relative Gini, while the absolute poverty is measured by the absolute change in the absolute Gini.
Empirically Ravallion finds evidence for a tradeoff between absolute poverty and absolute inequality, meaning that lower absolute poverty is associated with higher absolute inequality.
On the other hand there is no empirical evidence for a tradeoff between absolute poverty and relative poverty, so reductions in poverty often coincides with reductions in inequality (, in contrast to common beliefs).
