Ch 18 - Economic Inequality - Ch.18 Ch.18 EconomicInequality

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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  1. How do we measure  inequality? inequality? Inequality 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  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 is  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  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  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!
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Ch 18 - Economic Inequality - Ch.18 Ch.18 EconomicInequality

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