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
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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
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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
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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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