How Are These Similar?DenmarkSwedenBosniaGermanyAustria IndiaHow about these?NamibiaSwazilandEconomic InequalityReasons people consume not related to the product!• Positional vs Non positional Goods• 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 muchdid you spend?)• 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• 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• 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 apoorer country)• 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• 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• 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 CurveThe area between the line and curve is the area of inequality, the closer the curve gets to the line, then we have more equalityLorenz 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• Graph ResultsExamplePop Pop % Income Income %Ringo 25% 5 m 10%George 50% 5 m 20%John 75% 15 m 50%Paul 100% 25 m 100%Assume a four-person communityPaul makes 25 millionJohn makes 15 millGeorge makes 5 millRingo makes 5 millTotal of 50 millVertical 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• Gini of 0 is where A=0, A the area between line and curve• Gini of 1 is where B=0, B is the area under the lorenz curveInternational ComparisonsLow Gini’s• Denmark • Sweden• Bosnia• Germany• Austria• IndiaHigh Gini’sComparing Gini Coefficients• Canada .326• China .440• France .327• Japan .379• US .469U.S. Inequality Trends• 1970 .394• 1980 .403• 1990 .428• 2000 .462• 2010
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