Macroeconomics (3.4) Inequality and Poverty

Question 1

Economic Inequality

Answer 1

Refers to the degree that people in a population differ in their ability to satisfy their economic needs.

Question 2

Difference between equality and equity

Answer 2

• Equality refers to situations where economic outcomes are the same (or similar) for different people or social groups.
• Equity refers to the concept of fairness or evenness and is considered an economic objective.

Question 3

Gini Coefficient (or Gini Index)

Answer 3

Refers to a set of values (ranging from 0 to 1) that represent the degree of equality (or inequality) of income distribution in an economy.

Question 4

Poverty

Answer 4

Refers to the inability of an individual or family to afford an adequate standard of goods and services.

Question 5

Absolute Poverty

Answer 5

Refers to a situation where a person or family does not have enough income to meet basic human needs (shelter, food, safe drinking water, health and education) ( $1.90)

Question 6

Relative Poverty

Answer 6

Refers to a concept that compares the income of individuals or households in a society with median incomes

Question 7

Difficulties in measuring poverty

Answer 7

• Urban Poverty: High urban living costs exclude many urban poor from national poverty lines, leading to inadequate access to essentials like food and housing.
• Imperfect Data: Subjectivity in household surveys and underreporting of income from freelance work or investments can result in overestimated poverty levels.
• Disaggregated Poverty Data: Exclusion of homeless individuals and those in institutions leads to underestimation of poverty levels, as they are highly impacted by poverty.
• Poverty Lines: While poverty lines indicate the number or percentage of people below the poverty line, they do not reveal the severity of poverty. It is crucial to consider the extent to which individuals fall below the poverty line to assess the true level of poverty.

Question 8

Causes of economic inequality

Answer 8

• Inequality of opportunity
• Different levels of human capital (skills)
• Discrimination
• Government tax and benefits policies
• Globalization and technological change

Question 9

consequences of economic inequality

Answer 9

Decrease in economic growth
Low living standards
lack of Social and Political Stability

Question 10

Government Solutions for inequality

Answer 10

• A progressive tax system adjusts tax rates based on income levels, with higher rates for higher incomes and lower rates for lower incomes. This policy follows the ability-to-pay principle, where taxes are based on an individual or household’s ability to pay in relation to their income or wealth.
• Investment in Human Capital, particularly in education and healthcare, to ensure access for low-income groups who would otherwise under-consume these crucial merit goods due to poverty and low incomes.
• The government can provide targeted payments to vulnerable groups, such as low-income earners, older people, sick individuals, very poor individuals, children of poor families, unemployed individuals, and others, to alleviate their difficulties in affording basic necessities.

Question 11

What should the Lorenz curve diagram provide

Answer 11

• X axis: cumulative % of number of households
• Y axis: cumulative % of household income
• absolute equality line