Lesson 5 - Problems and Policies (Domestic): Poverty, Inequality, and Development

Personal distribution of income

it simply deals with individual persons or households and the total incomes they receive.

Kuznets Ratio

a measure of the degree of inequality between high and low income groups in a country

Lorenz Curve

a graph depicting the variance of the size distribution of income from perfect equality.

Perfect Equality

Gini coefficient of 0 indicates:

Perfect Inequality

Gini coefficient of 1

Anonymity Principle

It simply means that our measure of inequality should not depend on who has the higher income.

Scale Independence Principle

our measure of inequality should not depend on the size of the economy or the way we measure its income

Population Independence Principle

It states that the measure of inequality should not be based on the number of income recipients.

Transfer Principle or Pigou Dalton Principle

holding all other incomes constant, if we transfer some income from a richer person to a poorer person, the resulting new income distribution is more equal.

Functional Distributions

second common measure of income distribution used by economists; share of total national income that each of the factors of production (land, labor, capital) receives.

Ahluwalia-Chenery Welfare Index (ACWI)

A final approach to accounting for the distribution of income in assessing the quality of Growth is to value increases in income for all the individuals but to assign a higher weight income gains by lower income individuals than to gains by higher income individuals

Absolute poverty

a minimum level of subsistence that no family should be expected to live below; number of people who are unable to command sufficient resources to satisfy basic needs.

Headcount Index

The proportion of a country's population living below the poverty line. This is set at a level that remains constant in real terms so that we can chart our progress on an absolute level over time.

Total Poverty Gap (TPG)

The sum of the difference between the poverty line and actual income levels of all people living below that line.

Average Poverty Gap

on a per capita basis, this is found by dividing the TPG by the total population.

Foster-Greer-Thorbecke (FGT) index

A class of measures of the level of absolute poverty, which include as special cases the headcount ratio and the normalized income shortfall, but in other cases, notably the P2 measure, satisfy all four axioms for desirable poverty measures, including distribution sensitivity.

- Combines index measures; α=0 -> head count, α=1 -> poverty gap

Economic Inefficiency

extreme income inequality leads to

Welfare Function

A function that ranks different distributions of utility across consumers, whether they enter positively or negatively.