3.7 - conflicting objectives, equity, inequality, wealth, income, Lorenz and Gini, poverty

conflicting macroeconomic objectives

• low unemployment and low inflation

• high economic growth and low inflation

• high economic growth and environmental sustainability

• high economic growth and equity in income distribution

equity

recognizes each person’s/ group’s circumstances and allocates the exact resources/ opportunities needed for equal outcome

equality

each individual/group is given some resources/opportunities

wealth

total value of net assets

income

return on all factors of production owned by households (rent, wages, interest,profit)

types of inequality

• economic

• income

• wealth

economic inequality

difference in population’s ability to satisfy their economic needs

sources of economic inequality

• income and wealth

• education

• health and nutrition

• gender

• social status

income inequality

arises from differences in how evenly income is distributed among individuals or groups within a society.

wealth inequality

arises from differences in amount of net assets people own

how is economic inequality measured

• quintiles

• deciles

quintiles and deciles explained

• quintile = 20% of population

  • population divided into 5 quintiles

• deciles = 10% of population

  • population divided into 10 deciles

*if equal distribution = each quintile gets 20% of income, decile gets 10% of income

**in real world

• quintile 1 < 20% income

• quintile 5 > 20 % of income

Lorenz curve

• used to show degree of income/ wealth inequality in a economy

Gini coefficient/ index

summary measure of information about income distribution.

• coefficient of 0 represents perfect equality

• coefficient of 1 signifies maximum inequality.

• *has to be expressed in percentages

Gini index = a/a+b

reasons behind greater wealth inequality

• limited wage growth

  • difficult for low/middle class to save and accumulate wealth

• variations in consumption patterns

  • high-income tend to consume lower fraction of their income therefore have greater chance of saving and accumulating wealth

• income and wealth inequalities feed on each other

poverty

inability to satisfy minimum consumption needs

absolute poverty

when an individual/ household lacks sufficient income to meet basic human needs

• food

• housing

• clothing

• healthcare.

poverty line

minimum level of income deemed sufficient, below which individuals/ families are considered to be in poverty.

relative poverty

individuals/ households are unable to maintain an average standard of living compared to others in society.

• measured as 50% of income’s median in society (below is considered poor)

  • eg. $20000 is median, 50% → $10000, anyone below is poor

extreme poverty

where individuals live on less than $1.90 a day, lacking basic resources for survival.

• $3.20 a day in lower-middle income countries

• $5.50 a day in upper-middle income countries

groups with increased poverty rates than national averages

• older people

• women

• single-parent households

• children

• racial and ethnic groups

measurements of poverty

• poverty line

• minimum income standards (MIS)

• multidimensional poverty index (MPI)

minimum income standards (MIS)

produces budgets for a basket of goods required by households in order to achieve minimum standard of living

informs about:

• nr. of people living below the minimum income required for essentials

• relative contribution of each item in the basket to household’s abilities to achieve MIS

• changes over time

composite indicators

• try to capture more than 1 dimension of the issue in question

• MPI

multidimensional poverty index (MPI)

measures poverty in 3 dimensions and 10 indicators → each is intended to reflect deprivations

• health

  • child mortality

  • nutrition

• education

  • years of schooling

  • school attendance

• living standards

  • cooking fuel

  • sanitation

  • drinking water

  • electricity

  • housing

  • assets

MPI (0→ 1)↑ = poverty↑

• poor = deprived in at least 1/3 of the indicators

advantages of multidimensional poverty index

• can be broken up by indicators → provides better insights

  • possible to determine which indicator contributes most and compare to other countries

difficulties in measuring poverty

• poverty has different meaning meanings

• different approaches to measurement

• wealth and savings are not accounted for

• subjective household surveys

• doesn’t say by how much people wall below the poverty line

• over/underestimates of poverty line by government

  • over → to get more financial aid/assistance

  • under → to spend less money on solving poverty

opportunity

set of circumstances that make it possible for individuals to do something

causes of economic inequality and poverty

• inequality of opportunity

• discrimination

• unequal status and power

• tax and benefits policies

• technology changes

• supply-side policies

• unemployment

• low living standards

• social and political instability

impacts of income and wealth inequality

• low living standards

  • reduced access to education and healthcare

  • increased crime rates

• diminished trust in institutions.