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ECO 102 Development Economics

ECO 102 Development Economics. Aisha Khan Summer 2009 Section G & I Lecture Fourteen & FIfteen. Poverty and Inequality. Chapter Six. Measuring inequality. Size distributions of income Individual households income received Split into deciles Lorenz curves Cumulative percentages

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ECO 102 Development Economics

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  1. ECO 102 Development Economics Aisha Khan Summer 2009 Section G & I Lecture Fourteen & FIfteen

  2. Poverty and Inequality • Chapter Six

  3. Measuring inequality • Size distributions of income • Individual households income received • Split into deciles • Lorenz curves • Cumulative percentages • Gini coefficients • “lorenz criterion” • Functional distributions • Explains what fraction of income is being received by FOP’s

  4. Gini coefficient • Satisfies 4 properties • Anonymity principle  inequality should not be based on personal judgments about the rich and poor • Scale independence principle  inequality measurement should not vary with sizes of economies and scales such as dollars etc. • Population independence principle  population sizes should not alter inequality measurements • Transfer principle  holding all else constant, if we transfer money from rich to poor, the distribution of income should be equal.

  5. Measuring absolute poverty • Absolute poverty  • Headcount of those whose incomes falls below absolute poverty line • Headcount index = Headcount (H)/ Total pop’n (N) • * does not satisfy population independence principle

  6. Measuring absolute poverty • Poverty gap  to determine the total amount of income necessary to raise everyone up to the poverty line (not below it) • Total poverty gap (TPG) = • Average poverty gap (APG) = TPG/H • * these measures do not satisfy the distribution sensitivity between poor

  7. Foster-Greer-Thorbecke measure • Need to include coefficient of variation of incomes among poor • Satisfies all four principles

  8. Human poverty index • Similar to the HDI • Measured in terms of three deprivations • Deprivation of life • Deprivation of basic education • Deprivation of economic provisioning

  9. What’s so bad about inequality? • Important to measure welfare • W = W( Y , I , P )

  10. Dualistic development typologies How does economic growth affect inequality? • Modern sector enlargement growth typology • Modern sector is enlarged , wages constant • Modern sector enrichment growth typology • Growth is limited to a certain set of people in the modern sector • Traditional sector enrichment growth typology • All benefits of growth are divided amongst traditional sector workers with little growth in the modern sector

  11. * Lorenz curves for each can be shown to prove that • Traditional sector enrichment growth typology • Growth results in higher income  more equal relative distribution of income and less poverty • Modern sector enrichment growth typology • Growth results in higher income  less equal relative distribution of income and no change in poverty • Modern sector enlargement growth typology • Absolute incomes rise, absolute poverty is reduced, lorenz curves cross (ambiguous)

  12. Kuznets’ Inverted U-Hypothesis • Early stages of economic growth  inequality will worsen • Later stages of economics growth  inequality will become better

  13. Growth and Inequality • High rates of growth do not necessarily worsen the distribution of income • Character of economic growth is important

  14. Absolute Poverty

  15. Economics Characteristics of Poverty Groups • Rural poverty • Women and poverty • Ethnic minorities, Indigenous populations and poverty

  16. Range of Policy Options • Areas of intervention • Altering the functional distribution • Mitigating the size distribution • Moderating (reducing) the size distribution at the upper levels • Moderating (increasing) the size distribution at the lower levels

  17. Range of Policy Options • Altering the functional distribution of income through policies designed to change relative factor prices • Remove factor price distortions  that lower wages in certain jobs • Modifying the size distribution through progressive redistribution of asset ownership • Redistribution policies, land reform • Educational opportunities

  18. Range of Policy Options • Reducing the size distribution at the upper levels through progressive Income and Wealth Taxes • Direct transfer payments and the public provision of goods and services • Subsidies, workfare programs

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