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Questions and Answers
Which principle states that income can be ranked regardless of who is earning it?
Which principle states that income can be ranked regardless of who is earning it?
What does the term 'economic inequality' primarily refer to?
What does the term 'economic inequality' primarily refer to?
What does the Population Principle imply about changes in population size?
What does the Population Principle imply about changes in population size?
Which measure of inequality is explicitly described by the Gini Coefficient?
Which measure of inequality is explicitly described by the Gini Coefficient?
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What is a major limitation of the range as a measure of income inequality?
What is a major limitation of the range as a measure of income inequality?
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According to the Relative Income Principle, what is essential in determining inequality?
According to the Relative Income Principle, what is essential in determining inequality?
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Which measure of inequality is defined as the difference in incomes of the richest and the poorest individuals, divided by the mean?
Which measure of inequality is defined as the difference in incomes of the richest and the poorest individuals, divided by the mean?
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Which measure of inequality considers the distance from average income in its calculation?
Which measure of inequality considers the distance from average income in its calculation?
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What does the Kuznets Ratio compare?
What does the Kuznets Ratio compare?
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The Coefficient of Variation is defined in terms of which statistical concept?
The Coefficient of Variation is defined in terms of which statistical concept?
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Which income inequality measure is based on pairwise comparisons of incomes?
Which income inequality measure is based on pairwise comparisons of incomes?
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What is a key characteristic of the Coefficient of Variation?
What is a key characteristic of the Coefficient of Variation?
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Which of the following does not satisfy the Dalton Principle in measuring inequality?
Which of the following does not satisfy the Dalton Principle in measuring inequality?
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What is the outcome when a transfer is made from a poorer individual to a richer individual, according to the Dalton Principle?
What is the outcome when a transfer is made from a poorer individual to a richer individual, according to the Dalton Principle?
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Which statement correctly describes the Anonymity Principle?
Which statement correctly describes the Anonymity Principle?
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What does a higher value of the inequality index I indicate?
What does a higher value of the inequality index I indicate?
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How does cloning affect the measure of inequality according to the Population Principle?
How does cloning affect the measure of inequality according to the Population Principle?
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What is illustrated by the Lorenz curve?
What is illustrated by the Lorenz curve?
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What does the Lorenz Criterion measure?
What does the Lorenz Criterion measure?
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What can be said about an inequality measure that is Lorenz-consistent?
What can be said about an inequality measure that is Lorenz-consistent?
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Which principle implies that taking from the poor to give to the rich must worsen inequality?
Which principle implies that taking from the poor to give to the rich must worsen inequality?
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Study Notes
Economic Inequality
- Economic inequality pertains to uneven distribution of economic attributes like income or wealth among individuals within a country or between countries.
- Examines how total income is distributed among a country’s citizens and the wealth held by the richest compared to the poorest.
- Key motivations for studying inequality:
- Intrinsic: Reducing inequality can be a goal.
- Functional: Inequality influences other economic performance indicators (e.g., growth).
Measurement of Inequality
- Understanding economic inequality requires measurement methods.
- Relative inequality compares income distributions over time or between regions/countries.
Principles of Measurement
- Anonymity Principle: Income ranking is independent of individual identities; only ranks matter.
- Population Principle: Changes in population size do not affect inequality as long as income class proportions remain constant.
- Relative Income Principle: Only relative income differences are significant; scaling all incomes uniformly does not modify inequality levels.
- Dalton Principle: Transfers from poorer to richer individuals increase overall inequality; regressive transfers worsen inequality.
Lorenz Curve
- Illustrates cumulative income shares earned by progressively increasing population fractions, ordered from poorest to richest.
- A perfectly equal income distribution represents a 45-degree line (Lorenz curve).
- The gap between the Lorenz curve and the 45-degree line visually indicates the extent of inequality.
Lorenz Criterion
- An inequality measure is Lorenz-consistent if it ranks distributions accordingly, based on their Lorenz curves.
Numerical Measures of Inequality
- Numerical summaries provide clear rankings of income distributions when Lorenz curves cross complicate ranking.
Key Inequality Measures
- Range: Difference between the highest and lowest income.
- Kuznets Ratio: Compares income shares of different population segments.
- Mean Absolute Deviation (MAD): Average deviation of incomes from the mean, expressed as a fraction of total income.
- Coefficient of Variation (CV): Standard deviation of income divided by the mean, emphasizing large deviations.
- Gini Coefficient: Reflects pairwise income comparisons, highlighting total income inequality.
Formulae Relevant to Inequality Measures
-
Range:
- R = (ym - y1) / μ
- Basic measure that overlooks middle incomes and violates Dalton Principle.
-
Kuznets Ratio:
- Compares the richest x% of income to the poorest y% of income.
-
Mean Absolute Deviation:
- M = Σ(nj(yj - μ)) / μ
- May not conform to Dalton Principle in certain income distributions.
-
Coefficient of Variation:
- C = (1/m) * Σ((yj - μ)²) / μ
- Captures greater deviations from mean income and adheres to measuring principles.
-
Gini Coefficient:
- G = (1/(2nμ)) * ΣΣnj*nk|yj - yk|
- A comprehensive measure of overall income inequality through pairwise comparisons.
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Description
This quiz explores the concept of economic inequality, focusing on how income and wealth are distributed within and between countries. It also delves into the motivations for studying inequality and the principles behind measuring it. Understanding these elements is essential for grasping the broader implications of economic disparities.
