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Chapter 26 econ - CHAPTER 28 The Distribution of Income and...

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CHAPTER 28 The Distribution of Income and Poverty One of the most emotionally and politically charged issues in economics are the distribution and redistribution of income. The emotional fervor evident in a debate about how to increase the income of the nation can rarely approach a similar debate on how that income should be distributed among the various members of society. Income distribution is an area where the boundary between normative and positive economics is thin and often breached, as will happen now and again in this chapter. Given the highly emotional nature of this subject, Chapter 28 makes a determined effort to avoid making judgments, choosing instead to present the facts and their various interpretations, to describe some of the causes of income inequalities and the views various parties hold toward them, and to discuss a few prominent normative theories on income distribution from the perspectives of both proponents and critics. The second half of the chapter turns to the particular income distribution problem that is largely responsible for its political and emotional volatility: poverty . We begin with two definitions of poverty—one absolute and the other relative. The chapter then briefly discusses some causes of poverty before concluding with a discussion of three ways of addressing the issue of poverty: the current welfare system, the negative income tax , and the market-oriented approach. CHAPTER OBJECTIVES Upon completing this chapter, your students should be able to: 1. Cite numerous facts about income distribution. 2. Explain the effects of age on the income distribution. 3. Explain how economists measure income inequality. 4. Discuss the reasons for income inequality. 5. Explain various normative standards of income distribution. 6. Identify the difference between absolute and relative poverty. 7. Discuss some of the causes of poverty. KEY TERMS ex ante distribution (of income) Gini coefficient ex post distribution (of income) human capital transfer payments wage discrimination in-kind transfer payments veil of ignorance Lorenz curve poverty income threshold (poverty line) 15
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16 Chapter 28 CHAPTER OUTLINE I.SOME FACTS ABOUT INCOME DISTRIBUTION A.Who Are the Rich and How Rich Are They? —By many interpretations, the lowest fifth (lowest 20 percent) of family income groups is considered to be poor, the top fifth is considered to be rich. If we want a more restrictive definition of “rich,” we can look at the top 5 percent. In 2000, the lowest 20 percent of families in the United States earned 3.6 percent of the total money income and the highest 20 percent earned 49.6 percent, or more than ten times as much. (See Exhibit 1.) Exhibit 2 shows the income shares of family groups in the United States in 1967 and 2000. As we can see, the top 20 percent of families earned 43.8 percent of total money income in 1967, as opposed to 49.6 percent in 2000, and the bottom 20 percent earned only 4.0 percent of total income in 1967, as opposed to 3.6 percent in 2000. From this, we can see that income distribution
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