Macro Objectives, Inequality & Poverty - Summary

Sustainable Level of Government Debt

  • Measurement: Debt to GDP ratio.

  • Calculation: Compare debt with GDP.

  • Direct relationship between budget deficit and national debt.

  • Costs of high government debt:

    • Debt servicing costs (loan repayment + interest).

    • Low credit ratings.

    • Negative impacts on future taxation and government spending (austerity).

Calculation of Consumer Price Index (CPI)

  • Weighted CPI uses quantities purchased as statistical weights.

  • Inflation rate calculation: [(Value<em>year2−Value</em>year1)Valueyear1]×100[\frac{(Value<em>{year2} - Value</em>{year1})}{Value_{year1}}] \times 100

  • Weighted CPI is more accurate for measuring inflation changes.

Economics of Inequality and Poverty

  • Equality: Equal distribution of income.

  • Equity: Income inequalities to create economic incentives.

  • Unequal Distribution of Income: Imbalances of income distributions.

  • Unequal Distribution of Wealth: Imbalances in the spread of a country’s wealth among its citizens.

Measuring Economic Inequality

  • Lorenz Curve: Visual representation of income distribution.

  • Plots percentages of the population against income shares.

  • Gini Coefficient: Measures income inequality.

    • Value between 0 and 1 (0 = perfect equality, 1 = perfect inequality).

    • Formula: Gini=Area between diagonal and Lorenz curveTotal area under the diagonalGini = \frac{Area \ between \ diagonal \ and \ Lorenz \ curve}{Total \ area \ under \ the \ diagonal}

Poverty

  • Absolute Poverty: Inability to satisfy basic needs. / in any standard would be considered poor if their income falls below the poverty line, which is defined as the minimum level of income deemed adequate in a given country.

  • Relative Poverty: Varies across societies and changes over time; compares income. / This measure reflects households earning significantly less than the median income, highlighting the disparity between different socio-economic groups.

  • Causes of Poverty: Factors that contribute to poverty include unemployment, lack of education, discrimination, and economic instability, which can vary in severity depending on the region or population.

  • Effects of Poverty: The consequences of poverty can lead to a range of social issues, including poor health outcomes, limited access to education, and increased crime rates, ultimately perpetuating the cycle of poverty across generations. Additionally, addressing poverty requires a multifaceted approach that includes policy reforms, social programs, and community engagement to create sustainable solutions.

Measuring Poverty

  • Single Indicators: International poverty lines (e.g., World Bank: < $1.25/day = extreme poverty, < $2/day = moderate poverty).

  • Composite Indicators: Multidimensional Poverty Index (MPI).

Multidimensional Poverty Index (MPI)

  • Measures poverty in health, education, and living standards.

Difficulties in Measuring Poverty

  • Discrepancies in national vs. international poverty lines.

  • Subjectivity of relative poverty.

  • Ignoring the nature of low income (permanent vs. short-term).

  • Limitations of purchasing power parity (PPP) figures.

Causes of Economic Inequality and Poverty

  1. Inequality of opportunity

  2. Different levels of resource ownership

  3. Different levels of human capital

  4. Discrimination (gender, race and others)

  5. Unequal status and power

  6. Government tax and benefits policies

  7. Globalization and technological change

  8. Market-based supply-side policies

Gender Inequality

  • Global Gender Gap Index (GGGI) quantifies gender discrimination.

  • Parameters: Economic participation, educational attainment, health, political empowerment.

  • GGGI ranges from 0 (highest gap) to 1.0 (no gap).

Impact of Income/Wealth Inequality

  • On Economic Growth: Debatable; can create incentives or dampen prospects.

  • On Standard of Living: Unequal spending leads to further inequalities.

  • On Social Stability: More equality leads to harmony; inequality leads to unrest.

Role of Taxation

  • Governments redistribute income/wealth through taxation.

  • Effective tax structure:

    • Certainty, convenience, economic, equitable.

Tax Systems

  • Progressive: Higher income earners pay a larger percentage of their income in taxes.

  • Regressive: Lower income earners pay a larger percentage of their income in taxes.

  • Proportional: Everyone pays the same percentage of their income in taxes.

Direct Taxes

  • Personal income, corporate income, wealth