How Are These Similar Denmark Sweden Bosnia Germany Austria India How about these Namibia Swaziland Economic Inequality Reasons people consume not related to the product Positional vs Non positional Goods did you spend Positional Goods relative consumption matters i e we care about what others are getting compared to us not the size of bottle but the label how much Non positional Goods absolute consumption levels are more important than relative levels more is better larger bottle of water People voted they would rather have a smaller house as long as theirs was larger than their neighbors POSITIONAL cid 127 Would rather have more vacation time even if not doing as good as peers NON POSITIONAL Social Motives for Consumption Bandwagon Effect don t get left behind Red Sox after they win the world series if there s a fad then you don t wanna be left behind Snob Effect it s cool to be first different The newest iPhone having it before anyone else does Veblen Effect conspicuous consumption flaunting wealth rolex watch not many people can afford it you re not necessarily the first Easterlin Paradox poorer country cid 127 Within a specific group higher incomes correlate with more happiness a brain surgeon with higher income is happier than a surgeon with lower income BUT average reported happiness is not correlated with per capita income above a minimal threshold It s not the case americans are happier than a UMass student vs wall street person vs surgeon you can t guess who s happier based on income Happiness is based on you relative to those around you cid 127 Within a peer group we pay a lot of attention to how we re doing but how a student is doing compared to how a surgeon is doing is completely different Different expectations The existence of a paradox is controversial cid 127 We know when we get to a certain threshold then more income doesn t matter Tools of Analysis In 1905 Max Lorenz develops the Lorenz Curve Lorenz Curve The area between the line and curve is the area of inequality the closer the curve gets to the line then we have more equality Lorenz curve for the US The first 20 had 3 of the income 40 had 12 60 had a little over 25 100 of households had 100 Blue region measures inequality Constructing the Lorenz Curve Rank incomes low to high Track cumulative totals cid 127 Graph Results Example Pop Ringo George John Pop 25 50 75 Income 5 m 5 m 15 m Income 10 20 50 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 Paul 100 25 m 100 Assume a four person community Paul makes 25 million John makes 15 mill George makes 5 mill Ringo makes 5 mill Total of 50 mill Vertical axis of income 0 100 Horizontal is the pop 0 100 Gini Coefficients how far off we are from perfect inequality The gini coefficient A A B Smallest is zero perfect equality while largest is 1 perfect inequality The coefficient must be between 0 and 1 cid 127 Gini of 0 is where A 0 A the area between line and curve cid 127 Gini of 1 is where B 0 B is the area under the lorenz curve International Comparisons Low Gini s Denmark Sweden Bosnia cid 127 Germany Austria India High Gini s Comparing Gini Coefficients Canada 326 China 440 France 327 Japan 379 US 469 U S Inequality Trends 1970 394 1980 403 1990 428 2000 462 2010 469 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127
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