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Unformatted text preview: Ch. 18 Ch. 18 Economic I nequality Economic I nequality Olivier Giovannoni ECO 304K: I ntroduction to Microeconomics Outline Outline This chapter deals with inequality, an important and real world outcome of economic activity. I t is a nice conclusion to what we have done so far introduction, consumers, producers, markets and special cases. I t is a bridge with the macroeconomics class and the statistics class. 1. H ow do we measur e inequality? 1. The sour ces of economic inequality 1. I ncome r edistr ibution ch18s2 1. H ow do we measur e 1. H ow do we measur e inequality? inequality? I nequality of what? Of wealth, of wages, of income (pre or posttax)? I nequality of income is the most common measur e. I ncome = 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 1. H ow do we measur e 1. H ow do we measur e 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. I f income was randomly distributed this distribution would be a bell cur ve (normal distribution, not skewed in any way) and the median would be the same as 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 aver age income is $63,000. ch18s4 1. H ow do we measur e 1. H ow do we measur e 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%. I n 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: per centiles, deciles, quar tiles ch18s5 1. H ow do we measur e 1. H ow do we measur e inequality? inequality? Alternatively one can represent those quintiles on a graph called the Lor enz cur ve (Max Lorenz, 1905, American economist): The L or enz cur ve is a cumulative cur ve: 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 per fect equality line: (the 20/20, 40/40, line)....
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 Fall '08
 Giovannoni
 Microeconomics

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