Chapter 20 Notes

Chapter 20 Notes - Chapter 20 Notes Income inequality and...

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Chapter 20 Notes: Income inequality and Poverty A person’s earnings depend on supply and demand for that person’s labor B/c labor earnings make up ¾ of the total income in US economy, the factors that determine wages are also largely responsible for determining how the economy’s total income is distributed among various members of society. o Determines who is rich and who is poor Governments can sometimes improve market outcomes Many economists believe that the government should redistribute income to achieve greater equality. When the government enacts policies to make the distribution of income more equitable, it distorts incentives, alters behavior, and makes the allocation of resources less efficient. The Measurement of Inequality How much inequality is in our society? How many people live in poverty? What problems arise in measuring the amount of inequality? How often do people move among income classes? US income inequality To examine differences in the income distribution over time economists use the share of total income that each group of families received in selected years. o See table pg 433 Rises in Inequality o Increases in international trade with low-wage countries o Changes in technology have reduced the demand for unskilled labor & raise the demand for skilled labor Wages of unskilled worked have fallen Inequality around the world How does the amount of inequlity in the US compare to that of other countries?
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o Hard to answer o Not enough data o Not every country collects data same way o When there is a difference in two countries it can never before sure if it reflects a true difference in the economies or merely a difference in the way data is collected. o See table 3 pg 434 o When countries are ranked on inequality the US is in the middle It has more income inequality than other economically advanced countries (japan, Germany, Canada) but has more equal distribution than less advanced countries. The Poverty Rate Poverty rate: percentage of the population whose family income falls below an absolute level called the poverty line. Poverty line: an absolute level of income set by the federal gov for each family size below which a family is deemed to be in poverty o If the U.S. government determines that the cost of feeding an urban family of six is $6,000 per year, then the official poverty line for a family of that type is 18,000. Because the poverty line is absolute rather than relative, more families are pushed above it as economic growth pushed the entire income distribution upward. Since 1973 the poverty rate has not declined o Due to increasing inequality o Economic growth has raised the income of the typical family but has prevented the poorest families from sharing this prosperity Poverty does not affect everyone with equal frequency o RACE: Blacks/Hispanics are about three times more likely to live in pov that whites o AGE: children are more likely to be members of poor families and the elderly are less
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Chapter 20 Notes - Chapter 20 Notes Income inequality and...

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