Ch 18 - Economic Inequality

# Ch 18 - Economic Inequality - Ch 18 Economic Inequality...

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Ch. 18 Ch. 18 Economic Inequality Economic Inequality Olivier Giovannoni ECO 304K: Introduction to Microeconomics

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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 ch18s2
1. How do we measure inequality? inequality? I nequality of what? Of wealth, of wages, of income (pre- or post-tax…)? 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): ch18s3

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1. How do we measure inequality? inequality? 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 (“normal distribution”, not skewed in any way) and the median would be the same as the mean. Obviously income o The mode is the typical income (\$13,000, the most common) o The median represents the “average Joe”: 50% earn less than \$46,000 and the other 50% earn less, o The average income is \$63,000. ch18s4
1. How do we measure inequality? 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 , from the lowest 20%, to the 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 the 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… ch18s5

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1. How do we measure inequality? inequality? Alternatively one can represent those quintiles on a graph called the Lorenz curve (Max Lorenz, 1905, American economist): The Lorenz curve is a cumulative curve: Point A is the 3.4% of income that the poorest 20% make. Point B is the 8.6% of income that the next fifth makes plus the previous 3.4%, etc… So in the end 100% of households account for 100% of income! The interesting point is that we can see the perfect equality line: (the 20/20, 40/40, … line). So the difference between the Lorenz curve and the perfect equality line shows the extent of inequality: The further the Lorenz curve from the line, the greater inequality. ch18s6
1. How do we measure inequality? inequality? Also the Lorenz curve can be used for the distribution of wealth . (same calculations but with wealth data) Empirically the Lorenz curve for wealth is further from the equality line than the Lorenz curve for income: wealth is even more unequally distributed than income .

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