a Order the population from poorest to richest then divide into ECON315 Notes Exam 2 Professor Stefania Scandizzo University of Maryland How Do We Measure Inequality 1 Frequency distributions 2 Size Distribution quintiles i Bottom 20 ii 2nd 20 iii 3rd 20 iv 4th 20 v Richest 20 b Share in total income Richest 20 Poorest 20 3 Lorenz Curve income equality 4 GINI Coefficient a GINI A A B b GINI 0 1 a Perfect inequality 99 of population have none and dictator has all b The smaller the area above the Lorenz curve the more equal income i 0 perfect equality ii 1 perfect inequality Stylized Facts o Latin America highest inequality o Eastern Europe low inequality but increasing o Asia low but increasing o Africa varied o Industrialized countries low except U S Why do we have differing levels of inequality across the world o What determines income inequality What is the relationship between income inequality and growth Growth affect inequality o KUZNETS CURVE disproven Growth isn t causing inequality but what is Inequality affect growth o On one hand 1 When income is concentrated in the hands of a few Saving Investment in key investments for capital accumulation BUT in developing countries rich tend to invest domestically even if rich are saving more not necessarily domestically Income inequality creates incentive to work hard and succeed 2 a Social mobility falling in the U S moving to another income bracket quintile b How to measure i Intergenerational earnings elasticity 1 How much 1 rise in father s income affects your expected earnings c Great Gatsby Curve o On the other hand 1 If high inequality poor can t invest and many productive investments won t be made therefore growth Income inequality violence and political unrest and growth inequality populist regimes excessive focus on redistribution inequality rich capture political process o govnt policies favor the elite o inequality becomes more entrenched We care about income inequality because of its relationship to growth Income Inequality Poverty Economic growth and income distribution extent of poverty Growth is necessary but not efficient Poverty is a multidimensional concept o World Bank Poverty line is different for different countries Headcount index of people households of of population below the poverty line POVERTY LINE GRAPH 0 1 poverty gap index measures intensity of poverty o 0 All poor at the poverty line o 1 All poor have 0 income Extreme ultra poverty differs from poverty o Depth extent of deprivation o Length of time o Breadth of dimensions Malnutrition illiteracy etc Characteristics of poverty what the poor say 5 common characteristics dimensions LACK of 1 Material well being 2 Physical well being 3 Security a Personal safety b Insecure livelihood 4 Freedom of action choice a Powerlessness 5 Social well being Poor describe 4 common pervasive problems 1 Corruption a No legal recourse no money to pay off 2 Violence conflict public safety 3 4 POWERLESSNESS LACK OF VOICE Insecure livelihood To reduce poverty 2 elements are critical 1 Rate of economic growth 2 Level of resources devoted to poverty programs and quality of those programs a Economic growth poverty b economic growth dec poverty Economic growth is a tide that raises all boats trickle down Poverty Programs Immiserizing growth growth with poverty 1 Investment in education and health i e investment in human capital 2 Social safety nets help those that cannot take the advantage of market opportunities a Income transfers Do economic growth exclude by pass the poor Do poverty programs dec growth NO Why not At least 5 reasons 1 Empirical evidence a Rich in developing countries unlike those in developed countries DO NOT invest their savings locally 2 Poor s income demand for local goods Rich s income luxury goods imported Population and Economic Growth World population today 7 billion o only 15 reside in industrialized countries Projection for 2050 9 11 billion Pop Growth economic growth Demographic transition o How birth rates and death rates affect population growth Natural increase in population crude birth rate crude death rate World population growth natural increase in population Country pop growth o Total fertility rate dec in almost all countries women are having less children o Replacement TFR 2 1 o POPULATION MOMENTUM Fertility decisions echo into the future How does economic growth affect population growth o Death rate o Birth rate Biological Social Economic Look at decision to have children as economic one costs and benefits Benefits o Work o Security in old age o Psychic benefit Costs Implications o Explicit Food clothing shelter education health o Implicit loss of earnings to care of children 1 Children earn income fertility Infant deaths dec fertility dec 2 3 Social security system fertility dec 4 opportunities for women fertility dec 5 Income costs less prohibitive fertility Empirical evidence 1 Income Fertility dec Are children inferior goods New household economics Parents choose 1 number of children 2 quality of children education health Subject to 1 Cost of g s 2 TIME Mother s wages opportunity cost of time 1 Demand for time intensive activities dec 2 children dec Income effect Substitution effect No simple correlation BUT this doesn t mean there is no relationship between n g GDP pop It s just more complicated Growth GDP pop g n Dependency ratio non working persons total population How does pop growth affect economic growth n 0 L factor accumulation g 1 Population pessimists Three different views Population pessimists Population optimists Population revisionists Malthus Coale and Hoover 3 Channels o Fall in birth rate income per capita 1 Fertility dec L dec a Easier for investment to be used for capital deepening instead of capital widening 2 Birth rates dec a Spending on health and education dec b Spending on physical capital 3 Dependency ratio dec a C dec I b K c g Population population growth economic growth 1 Population pessimists previous 2 Population optimisits a Pop growth i L g ii Factor productivity services c Pop growth technological advance d Population of geniuses i Solve the problems of humanity 3 Population revisionists b Economics of scale in production and consumption infrastructure social a Effect of population growth pos or neg on economic growth depends on each country s particular conditions b Population growth is NOT the Primary impediment to growth c Focus on micro level MARKET FAILURE i Optimal fertility rates at household