Income Distribution and Inequality

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Questions and Answers

Explain how the Gini coefficient is derived from the Lorenz curve and what a higher Gini coefficient indicates about income distribution?

The Gini coefficient is calculated by dividing the area between the perfect equality line and the Lorenz curve by the total area under the perfect equality line. A higher Gini coefficient indicates greater income inequality.

How does the functional distribution of income differ from the personal distribution of income?

The functional distribution looks at income distribution based on factors of production (land, labor, capital) without considering the owner of the factor. The personal distribution looks at income distribution according to the size class of persons.

What are 'factor price distortions,' and how might they affect the efficient allocation of resources in an economy?

Factor price distortions occur when factors of production are not paid prices that reflect their true scarcity values. This can lead to an inefficient allocation of resources because market signals are not accurately reflecting the true costs and benefits.

Explain how progressive income taxes and redistribution policies can be used to address income inequality.

<p>Progressive income taxes, where higher incomes are taxed at higher rates, can reduce the disposable income of the wealthy. Redistribution policies can then transfer resources to lower-income groups through various social programs, reducing income inequality.</p> Signup and view all the answers

How does the Multidimensional Poverty Index (MPI) provide a more comprehensive measure of poverty than the Headcount Index?

<p>The MPI considers multiple deprivations at the household level, such as health, education, and living standards, while the Headcount Index only measures the proportion of the population below the poverty line.</p> Signup and view all the answers

What is the key proposition of the neoclassical price incentive model, and how does it relate to factor price distortions?

<p>The main proposition is that market prices must influence economic activities in the right direction. Factor price distortions must be removed (through subsidies or taxes) so that prices reflect the true opportunity cost of resources.</p> Signup and view all the answers

Differentiate between absolute poverty and relative poverty.

<p>Absolute poverty refers to a state where individuals lack the basic necessities such as food, clothing, and shelter. Relative poverty, in contrast, refers to a state where individuals' resources are significantly less compared to the average standard of living in their society.</p> Signup and view all the answers

How could land reform affect the distribution of agricultural incomes and rural development?

<p>Land reform aims to redistribute agricultural land, potentially increasing the income of landless or smallholder farmers. This can lead to improved rural development by boosting agricultural productivity and reducing rural poverty.</p> Signup and view all the answers

Explain the difference between public consumption and disposable income.

<p><code>Public consumption</code> refers to government spending on goods and services, including national defense and security. <code>Disposable income</code> is the income available to households for spending and saving after personal income taxes have been deducted.</p> Signup and view all the answers

How could a workfare program help reduce poverty and improve human capital?

<p>Workfare programs provide benefits in exchange for labor, offering income support while encouraging work habits and skills. This can improve human capital by providing work experience and training, potentially leading to better employment opportunities in the future.</p> Signup and view all the answers

Flashcards

Personal Distribution of Income

Distribution of income based on the size class of persons, regardless of income source.

Gini Coefficient

Numerical measure of income inequality, ranging from 0 (perfect equality) to 1 (perfect inequality).

Quintile

A 20% portion of a numerical quantity; dividing a population into five equal groups.

Decile

A 10% portion of a numerical quantity; dividing a population into ten equal groups.

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Functional Distribution of Income

Distribution of income to factors of production (land, labor, capital) without regard to ownership.

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Factors of Production

Land, labor, and capital required to produce a good or service.

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Income Inequality

Disproportionate distribution of total national income among households.

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Lorenz Curve

A graph depicting the variance of the size distribution of income from perfect equality.

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Absolute Poverty

Being unable to meet basic needs like food, clothing, and shelter.

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Headcount Index

Proportion of a country's population living below the poverty line.

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Study Notes

Personal Distribution of Income

  • Distribution according to size class of persons
  • Considers the share of total income accruing to specific percentages of the population
  • Does not take into account the sources of income

Gini Coefficient

  • Numerical measure of income inequality, ranging from 0 to 1
  • 0 represents perfect equality
  • 1 represents perfect inequality
  • Measured graphically using the Lorenz curve to measure the area of inequality

Quintile

  • 20% proportion of a numerical quantity
  • A population divided into quintiles results in five equal-sized groups

Decile

  • 10% portion of a numerical quantity
  • Dividing a population into deciles creates ten equal numerical groups

Functional Distribution of Income

  • Distribution of income to factors of production
  • Does not consider the ownership of these factors

Factors of Production

  • Resources or inputs needed to produce goods or services: land, labor, and capital

Income Inequality

  • Disproportionate distribution of total national income among households

Lorenz Curve

  • A graph showing the variance of the size distribution of income from perfect equality

Absolute Poverty

  • Inability to afford basic necessities: food, clothing, and shelter

Headcount Index

  • Proportion of a country’s population living below the poverty line

Total Poverty Gap (TPG)

  • The sum of the difference between the poverty line and income levels of the population in poverty

Foster-Greer-Thorbecke (FGT) Index

  • Measures the level of absolute poverty

Character of Economic Growth

  • Distributive implications of economic growth
  • Reflected in factors like participation in the growth process and asset ownership

Multidimensional Poverty Index (MPI)

  • Identifies the poor using dual cutoffs for levels and numbers of deprivations
  • Multiplies the percentage of poor people by the percent of weighted indicators for which households are deprived

Asset Ownership

  • Ownership of land, physical capital, human capital, and financial resources
  • Generates income for owners

Redistribution Policies

  • Policies to reduce income inequality and expand economic opportunities
  • Includes income tax policies and rural development policies

Land Reform

  • Reorganization and transformation of agrarian systems
  • Aims at improving the distribution of agricultural incomes

Progressive Income Tax

  • Tax rate increases with increasing personal incomes

Regressive Tax

  • The ratio of taxes to income tends to decrease as income increases

Indirect Taxes

  • Taxes on goods purchased by consumers
  • Includes customs duties, excise duties, sales taxes, and export duties

Public Consumption

  • All current expenditures for goods and services by all levels of government
  • Includes capital expenditures on national defense and security

Factor Price Distortions

  • Factors of production are paid prices not reflecting true scarcity values
  • Caused by institutional arrangements that interfere with market forces

Elasticity of Factor Substitution

  • Measures the degree of substitutability between factors of production
  • Happens when relative factor prices change

Subsidy

  • Government payment to producers or distributors
  • Aims to prevent decline, reduce prices, or encourage hiring

Workfare Program

  • Poverty alleviation program that requires work in exchange for benefits

Neoclassical Price Incentive Model

  • Market prices must be adjusted to remove factor price distortions influencing economic activities in the right direction
  • Adjustment is done through subsidies or taxes, so factor prices reflect the opportunity cost of resources

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