TEST 1 - Review Sheet

Question 1

Definition of Inequality:

Answer 1

The unequal distribution of household or individual income across the various participants in an economy. Income inequality is often presented as the percentage of income to a percentage of population.

Question 2

Definition of Poverty:

Answer 2

Absolute poverty measures the number of people living below a certain income threshold or the number of households unable to afford certain basic goods and services. In the United States, the poverty line was set by starting not from a calorie norm but from an economy food plan recommended by the Department of Agriculture, which was then multiplied by three to allow for goods other than food.

Question 3

GINI-coefficient of inequality:

Answer 3

The Gini index measures the area between the Lorenz curve and a hypothetical line of absolute equality, expressed as a percentage of the maximum area under the line. Thus a Gini index of 0 represents perfect equality, while an index of 100 implies perfect inequality.

Question 4

Issues in interpreting a Gini coefficient:

Answer 4

The same value may result from many different distribution curves. The demographic structure should be taken into account. Countries with an aging population, or with a baby boom, experience an increasing pre-tax Gini coefficient even if real income distribution for working adults remains constant.

Question 5

The Theil-index:

Answer 5

The Theil-index of inequality has the advantage of being additive across different subgroups or regions in the country. The Theil index, however, does not have a straightforward representation and lacks the appealing interpretation of the Gini coefficient.

Question 6

What is a between-area component of inequality?

Answer 6

Household income is determined by things such as education, gender, occupations as well as geographic factors.

Question 7

Kuznets Curve:

Answer 7

in the course of economic development, inequality first rises and then falls.

Question 8

Decile dispersion ratio:

Answer 8

Also sometimes used is the decile dispersion ratio, which presents the ratio of the average consumption or income of the richest 10 percent of the population divided by the average income of the bottom 10 percent. This ratio can also be calculated for other percentiles (for instance, dividing the average consumption of the richest 5 percent – the 95th percentile – by that of the poorest 5 percent – the 5th percentile). This ratio is readily interpretable, by expressing the income of the rich as multiples of that of the poor.

Question 9

Criteria that make a good measure of income inequality:

Answer 9

• Mean independence: if all incomes were doubled, the measure would not change. The Gini satisfies this.
• Population size independence: if the population were to change, the measure of inequality should not change, all else equal. The Gini satisfies this, too.
• Symmetry: If any two people swap incomes, there should be no change in the measure of inequality.
• Pigou-Dalton Transfer sensitivity: the transfer of income from rich to poor reduces measured inequality. The Gini satisfies.

Question 10

What is a good measure when comparing distributions over time?

Answer 10

Pen’s Parade is a form of quantile graph. Horizontally, lined up from poorest to richest and vertically, level of expenditure (income)/per capita. It’s mostly helpful when comparing different areas or periods.

Question 11

Measuring Growth:

Answer 11

Visually a growth incidence curve is a good way to show the growth. Need data from two different times, divide the populations from the two different data into centiles, adjust for inflation and then compute the percentage change in (real) expenditure per capita. One other way, is to compute the mean growth rate of expenditure per capita experienced by the poor.

Question 12

Engel’s Law:

Answer 12

As people become better off, and even while they are still poor by most standards, they spend a smaller fraction of their budgets on food—a regularity known as Engel’s Law.

Question 13

Poverty trap:

Answer 13

He’s weak and poor -> so he can’t work to get money -> bad circle.

Question 14

The Capacity Curve:

Answer 14

The first few calories are used by your body just to survive: they don’t make you strong. When you start eating enough to survive, the next calories start giving you strength. When you have more money, you have better work capacity, and leads to more income.

Question 15

Engel Curve:

Answer 15

• Horizontal line: log/per capita spending
• Vertical line: kg per capital calorie consumption
  -> when income increases by 1% > the proportion of food in the budget increases less than 1%.
  It’s an inelastic curve.

Question 16

The poverty gap measure of poverty:

Answer 16

Poverty gap is the mean shortfall from the poverty line (counting the nonpoor as having zero shortfall).

Question 17

The head count ratio:

Answer 17

is the most familiar measure of poverty and is defined as the fraction of the population in poverty.

Question 18

HDI:

Answer 18

United Nations Development Programme annually publishes a Human Development Index for each country that consists of an average of three measures: one for income, one for life expectancy, and one for literacy.

Question 19

Purchasing power parity (PPP) exchange rates:

Answer 19

are designed to convert currencies in a way that preserves purchasing power, and which, for the comparison between India and the United States, coverts 454 rupees to around $50 per person per month.

Question 20

Micawber Problem:

Answer 20

As he frequently observes, “Income twenty shillings, expenses nineteen shillings and sixpence—result, happiness. Income twenty shillings, expenses twenty shillings and sixpence—result, misery.”