Chapter 5: Poverty, Inequality, and Development
(Question 1)
Measuring Inequality
1)
Personal or Size distribution of income
2)
Functional or distributive factor share of distribution of income
Size Distribution
•
Deals with individual persons or households and the total incomes they
receive
•
How
and where the income are received does NOT matter
•
Economists then arrange this data into ascending order based on incomes and
divide the groups into quintiles (fifths) or deciles (tenths)
•
A common measure of income inequality can be used is the ratio of incomes
of the top 20% divided by the bottom 40%. This is commonly called
Kuznets
Ratio
Lorenz Curves
•
A graph ( page 197199)
•
The closer the plotted line to the diagonal line the more income equality, the
larger the bend between the plotted and diagonal lines, the more inequality.
Gini Coefficients (an aggregrate inequality measurement)
•
Calculates the ratio of the area between the diagonal and the Lorenz curve
divided by the total area of the half square in which the curve lies.
•
Page 200201
•
The ratio is called the
Gini Concentration Ratio.
•
0 is a perfect ratio, showing perfect EQUALITY
•
1 is the worst ratio, showing perfect INEQUALITY
•
When comparing changes in one economy or comparing two different
inequalities, if two Lorenz curves cross it means we “need more info” to
determine which is more equal
•
Gini coefficient satisfies four desirable properties
Desirable Properties when measuring equality
1)
Anonymity principle measure of inequality should not depend on who has the
higher income (shouldn’t depend on whether we believe the rich or poor to be
good or bad ppl)
2)
Scale independence principle measure of inequality should not depend on the
size of the economy or the way we measure its income (doesn’t matter
whether economy is rich or poor, using dollars or rupees)
3)
Population independence principle measure of inequality should not be based
on number of income recipients
4)
Transfer principle states that if all else is constant, transferring income from a
richer to a poorer person the resulting income distribution should be more
equal
Functional Distribution
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•
Explains the share of total national income that each of the factors of
production receive (ie: land, labor, capital)
•
Supply and demand curves are assumed to determine unit prices of each
product
•
Wage is measured by total level of employment in each sector to get a
measure of total wage payments
•
Page 201 and 202
•
Fails to take into account the role of nommarket forces such as power in
determining these factor prices. (unions, monopolies, etc)
Measuring Absolute Poverty
•
Absolute poverty people unable to command sufficient resources to satisfy
basic needs
•
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 Spring '08
 gassler
 Economics, per capita

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