Poverty and inequality part 1

GDP

GDP

monetary value of all the finished g/s produced within country's borders in a year, by person

non-market activities

contribute to the national income, but not counted in GDP measurement (such as unpaid care services)

monetary value of the shadow economy

money in circulation - money used by consumption

Purchasing Power Parity (PPP)

rate at which the currency of one country would have to be converted into that of another country to buy the same amount of goods and services in each country; adjusted international dollars

Lorenz curve

shows the connection between cumulative percentgage of households and that of income(order from the poorest to the richest); total equality = 45-degree line

Gini coefficient measures

the ratio of the area between the 45 degree line of perfect income equality and the Lorenz curve, to the entire area under the 45 degree line of perfect income equality is caluclated as A/(A+B)

If Gini coefficient = 0

income equality is perfect

If Gini coefficient = 1

all income is in hands of one household

poverty rate

percentage of the population whose family income falls below the poverty line

absolute poverty

individuals don't have access to basic requirement of life (food, shelter and clothing)

relative poverty

individuals are excluded from being able to take part in acceptable standards of living in a society

poverty line

in Europe - set at 60% of the median income; World Bank - 1.90 international dollars/day

drivers of poverty

political conflicts, climate crisis, institutions (corruption)

components of GDP

C(private consumption) + I(investment=goods to expand production)+G(government spendings(consumption))+NX(net exports(export-import))

GDP in closed economy

C+I+G

model for consumption

c0+c1*Yd(disposable income)=c0+c1(Y-T) c1=marginal propensity to consume(how much private consumption increases if income increases by 1)

disposable income

Y(income) - T(taxes minus government transfers)

total demand in the economy

Z=c0+c1(Y-T)+I+G

equilibrium of the economy

Y(production)=Z(demand)

equilibrium output

Y = (1/(1− c1))[c0+I+G-c1T]

multiplier

1/(1-c1)=how much the change of consume propensity will effect the whole output; the closer c1 is to 1 - the larger it is

total increase in production considering multplier effect

sum of geometric series of 1/(1-c1)

Ricardian equivalence

with lowering taxes, rational private households start to save more to repay these taxes in the future instead of consuming more

paradox of thrift

with increased savings, total output of the economy decreases

savings

S=I=Y-C=−c0 + (1 − c1)*Y

savings are good in long-run growth but

bad in short-run as one has less income left to spend in the economy