N05 - N05 P1 2 a Explain the relationship between the...

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N05 P1 2. a) Explain the relationship between the Lorenz Curve and the Gini Coefficient. [10] Lorenz Curve • a curve showing the proportion of national income earned by any given percentage of the population • used to show the degree of inequality of income in a society • the farther from the 45 line is the curve, the greater the degree of inequality Gini Coefficient • a statistical measure of the degree of income inequality • measures the area between the 45 line and the Lorenz Curve as a proportion of the entire area under the 45 line • ranges between 0 and 1 • a Gini Coefficient of 0 represents complete equality; coefficient of 1 represents complete inequality Up to a maximum of [6 marks] if there is no diagram(s). Up to a maximum of [5 marks] if the relationship between the Lorenz Curve and the Gini Coefficient is not examined. b) Evaluate the effectiveness of the various methods that governments may use to redistribute income. [15] • explanation of the different forms of taxation and how they can be used to redistribute income • discussion of the issues associated with using taxes to redistribute income • explanation of transfer payments made by government • discussion of the issues associated with transfer payments • subsidies • merit and public goods 3. a) Explain the concepts of trade creation and trade diversion. [10] Trade Creation • results from a country joining a trading bloc • consumption shifts from a high-cost producer to a low-cost producer • removal of trade barriers allows greater specialization according to comparative advantage Trade Diversion • results from the formation of a trading bloc • consumption shifts from a lower-cost producer outside the trading bloc to a higher cost producer within the trading bloc • there is a net loss in world welfare b) Evaluate the advantages and disadvantages of joining a trading bloc. [15] The answer should identify the type of trading bloc under discussion (free trade area, customs union or common market).
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