Topic 3 - Income Inequality and Development

Question 1

What are the two dif types of inequality?

Answer 1

• Wealth Inequality

- Income Inequality

Question 2

What does Ray say Economic Inequality is?

Answer 2

Economic inequality is the fundamental disparity that permits one individual certain material choices while denying another individual those very same choices”

Question 3

How can using GDP per capita be bad as a measure for Inequality?

Answer 3

Averages can mask disparities

Question 4

How do we define Income Inequality?

Answer 4

Captures how aggregate income is distributed across a population AFTER the income has been achieved.

The income share held by the top X% of the population relative to that held by bottom Y%.

Question 5

How do we define Inequity?

Answer 5

Captures degree of equality in opportunities for income, education, health etc.

Sen (1985) argues that Inequity is the Inequality in the distribution of ‘capabilities’.

Question 6

What is Vertical Inequality?

Answer 6

Distribution of income and wealth across households measured by Gini ratio

Question 7

What is Horizontal Inequality?

Answer 7

Treatment based on gender,race,age etc.

Question 8

What are some desirable properties for an Inequality Measure?

Answer 8

1. Anonymity: Measure should not matter on who has income
2. Scale Independence: Should not matter on size of economy but relative incomes instead
3. Population Independence:
   Should not be based on population since inequality distribution would be more important
4. (Dalton-Pigou’s) Transfer Principle:
   All thing constant, if you transfer money from poor to rich the new distribution is more unequal

Question 9

What are the differing ways to measure Inequality? (Coefficient of Variation)

Answer 9

1. Coefficient of Variation (CV)
   𝝈/μ = St Dev of Income per unit of Avg Income

Where St Dev measures dispersion

Question 10

What are the differing ways to measure Inequality? (The Theil Entropy Index)

Answer 10

SEE MATHS DERIVATION IN NOTES

But essentially identifies both within group inequality and between group inequality

Question 11

What are the differing ways to measure Inequality? (The Lorenz Curve)

Answer 11

A graphical representation of inequality in ownership

STEPS:
1. Rank individuals from poorest to richest
2. Represent cumulative percentage of population on the horizontal axis and cumulative percentage
of expenditure (or ownership or whatever the subject) on the vertical axis.
3. Lorenz curve can then be plotted.

SEE WHAT IT LOOKS LIKE IN NOTES

Question 12

How do you calculate the Gini Coefficient?

Answer 12

G = A/(A+B)
G = SEE IN NOTES THIS IS THE PROPER WAY TO CALCULATE IT AND COMES WITH EASY EXAMPLE

Question 13

What are the Problems with the Lorenz Curve?

Answer 13

• > When they cross, results inconclusive

- > 2 states with same Gini not mean same inequality structure

Question 14

How do you calculate the Kuznet’s ratio?

Answer 14

Look at proportion of incomes per group of population i.e richest 1%,20%,50% etc.
- The ratio explains the ratio of income shares of chose % of pop

i.e Top 10% compared to bottom 10, so if ratio 25:3, for every £3 lowest earn, the top 10% earn £25

Question 15

What is the Kuznet’s inverted U hypothesis?

Answer 15

Inequality rises at beginning of process of development and decreases as benefits trickle through all

Question 16

What is Acemoglu and Robinson’s explanation into the U curve?

Answer 16

Political Pressure

At early stages, elite take more of the spoils then because of revolts -> Political pressure to improve inequality

Question 17

What is the general calculation used for seeing if there is an inverted U?

Answer 17

SEE DENOTATION IN NOTES

Question 18

What does Deininger and Squire find in evidence of Inverted U?

Answer 18

• > They use panel data
• > They find that the Inverse U-shaped relationship is true only for 9 countries
• > In 80% of the sample there is no significant relationship

Question 19

What does Ahluwalia (1976) find in evidence for inverted U?

Answer 19

The top 20% income share initially increases then
decreases
• The low and middle income share decreases and
increases afterwards
• Kuznets hypothesis verified

Question 20

What are the impacts of Inequality on Econ Growth? (PT 1)

Answer 20

1. Aggregate rate of Savings and Growth
   Inequality is good for growth if it increases aggregate rate of savings, hence investment, capital accumulation and growth
2. Asset Concentration and TFP:
   ->Asset distribution is related to efficiency (hence growth)
   A)Bad for growth if asset concentration has inverse relationship with productivity
   B)Good for growth if economies of scale is huge
3. Social and Political Instability

Question 21

What are the impacts of Inequality on Econ Growth? (PT 2)

Answer 21

4. Access to Financial Mkts:
   High Inequality means many locked out of capital mkts, since high risk = high collateral
5. Inequality reduces invst in human capital
6. Inequality and incentives for crime, sabotage but low enough and encourage effort
7. Institutional Quality:
   Inequality can imply power in hands of a few, unfair policies and price setting

Question 22

What are the impacts of Inequality on Econ Growth? (PT 3)

Answer 22

8. Inequality and domestic market size
   More money in hands of rich means less goods bought domestically -> AD down
9. Inequality in Political Voting
   - High inequality = median voter is poor
   ->Pessimistic view is this discourages investment and savings for growth
   ->Optimistic view is this, when such fiscal expenditures are invested in growth enhancing ventures.

Question 23

What does Stiglitz argue in terms of inequality leading to diff voting behaviours?

Answer 23

In The Price of Inequality argues that inequality (and concentration of power)
leads to policies favouring the top 1% in the income distribution

Question 24

In thinking about policy options for inequality what are the 3 things to think about?

Answer 24

Size distributions:
To do with ‘who owns what or controls the productive assets’

Functional Distribution:
1.To do with production process and ownerships, 2. Returns/Incomes/Profits

Question 25

What are some policies to address the functional distribution?

Answer 25

• Are factors appropriately priced?
• If poor only asset is labour do we increase price of labour, high gains tax for rich, Removal of subsidies for capital/tax breaks

Question 26

What are some policies to address the size distribution?

Answer 26

• Redistribution like Land Reform to allow more poor to own land that can be used for farming (due to colonial legacy, apartheid etc.)
• Should be accompanied by policies to improve on land ownership (education,marketing etc.)
• Transfer Payments
  Should they have conditions like Progressa in Brazil or Unconditional?