If Lorenz curves of two distributions do cross then Lorenz criterion cannot be

If lorenz curves of two distributions do cross then

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- If Lorenz curves of two distributions do cross, then Lorenz criterion cannot be applied . In this case different inequality measures which still satisfy all four criteria may give contradictory results. The effect of income on inequality : Kuznets - Lewis 2 sector model: ² Dual economy: labor surplus and subsistence wages in rural sector, modern urban sector with higher wages and profits. - Growth in modern sector causes higher inequality in the short-run because rural wages increase slowly and modern sector is initially relatively small. Inequality and income growth ² 3 reasons why inequality may have impact on economic development: 1. Inequality affects aggregate savings if the marginal propensity to save varies across income 2. Inequality may affect the access to credit if credit markets are imperfect (are require collateral for instance) 3. Inequality may affect the security of property, social/political stability and the demand for taxation. 1. Savings - Classical growth model: higher savings ± more investment in capital ± higher growth - Common argument: ‘The rich have higher propensity to save and therefore for a given GDP it is better to have inequality so that some people will save’ - Issue: are marginal savings rates in- or decreasing ? ???????? Propensity to save increases with income. Higher savings with inequality. Lower savings in an equal society. Redistributing wealth may therefore adversely affect the savings rate and therefore economic growth in poor countries. 2. Credit - Inequality can affect growth if the credit market is imperfect. Downloaded by Vicky Gupta ([email protected]) lOMoARcPSD|3929542
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The credit market increases growth by providing credit for investments that increase output (economic growth). Asymmetric information in credit market: borrowers may exhibit opportunistic behavior, refuse to pay back the loan. - High inequality ± limited access to credit, few entrepreneurs, less demand for labor, low wages - Pareto inefficient: credit market failure limits the number of profitable transactions; lowers aggregate production and income - Inequality is replicated: poor cannot accumulate wealth because of low wages 3. Political Economy - Negative effect of equality on growth - Via security of property, social/political stability and the demand for taxation - Via political process: median voter determines the outcome of political process. If income distribution is unequal, the median voter is poor ± demand for redistribution. Result: higher capital taxes, distortion ± lower growth. Downloaded by Vicky Gupta ([email protected]) lOMoARcPSD|3929542
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HC 3. Worldwide Inequality Three concepts of world inequality - Unweighted international inequality (country GDPs per capita) - Population-weighted international inequality (based on people in country and then look at relative size) ± does not take into account the difference within the country, just looks at average.
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