CHAP 18 - Economic Inequality

CHAP 18 - Economic Inequality - CHAP 18 Economic Inequality...

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CHAP 18 CHAP 18 Economic Inequality Economic Inequality Olivier Giovannoni 304K: Introduction to Microeconomics Dec 5,  2007
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Outline Outline This chapter deals with inequality, an important and real world  outcome of economic activity. It is a nice conclusion to what we have  done so far –introduction, consumers, producers, markets and  “special cases”. It is a bridge with the macroeconomics class and the  statistics class. 1. How do we measure inequality? 1. The sources of economic inequality 1. Income redistribution
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1. How do we measure inequality? 1. How do we measure inequality? An important question is:  inequality of what?  Inequality  of income is the most common measure.  Income = market income (wages, rents, profits, interest,  etc…) + government transfers. A first way to see inequality in action is to plot the fraction  of the population vs. their income (2005 data for the US): The average > median because  the distribution is  positively  skewed:  there are more poor  people than rich people, and the  rich are very  rich. If income was randomly  distributed this distribution would  be a  bell curve  (not skewed in  any way) and the median would  be the same as the mean – obviously income is not random   The mode is the most common        income ($13,000)  The median represents the        “average joe”: 50% earn less  than     $46,000 and 50% earn less,   The average income is  $63,000.
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1. How do we measure inequality? 1. How do we measure inequality? You can also measure inequality through  quintiles .   Quintiles are the percentage of income received by  successive 20% shares of households. There are five  quintiles,  or fifths : lowest 20%, low 20%, average 20%,  high 20% and highest 20%. In 2005, the 20% poorest household earned 3.4% of all  income, whereas the richest 20% earned 50.4% of all  income. There are same number of households in each fifth; this  shows the extent of inequality and, over time, its changes. There are other popular decompositions of income:  percentiles, deciles,  quartiles…
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1. How do we measure inequality? 1. How do we measure inequality? Alternatively one can represent those quintiles on a graph  called the  Lorenz curve: Point A is the 3.4% of income that the poorest 20% make Point B is the 8.6% of income that the poor 20% make, plus the  previous 3.4%, Etc… The Lorentz curve is a cumulative curve. So at the end 100% of  households account for 100% of income! The interesting point is that we 
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This note was uploaded on 04/27/2008 for the course ECON 304K taught by Professor Ledyard during the Fall '08 term at University of Texas at Austin.

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CHAP 18 - Economic Inequality - CHAP 18 Economic Inequality...

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