-4 Poverty, Part 1

Measuring wealth of a country though GDP per capita

Easy to calculate and communicate, high availability of data, data correlates with the characteristics of developed countries

Non-market activities

contribute to the national income, but not counted in GDP measurement

Monetary value of the shadow economy

money in circulation - the money that is used by consumed

Purchasing power parity

the 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

Lorenz curve

Cumulative percentage of households and the cumulative percentage of income, ordered from the poorest households to the richest households

Total equity on a lorenz curve

45 degree line

Lorenz curve explanation

Poorer households usually have a relatively low share of income

Gini coefficient word definition

measures the ratio of the area between the 45-degree income equality and the Lorenz cureve to the entire area under the 45 degree line of perfect income equality

0 on the gini coeefficient

perfect income equality1 o

1 on gini coefficient

all income is in hands of one householdi

Gini formula

A/(A+B)

Demographic dividend

Higher economic growth from a decline in country's birth and death rates (and subsequent change in the age structure of the population)

European relative poverty

Poverty line set at 60% of the median income

International poverty line

1.90

Relative poverty

Individuals are excluded from being able to take part in what are considered the normal, acceptable standards of living in a society

Big push theory

A country would need a big package of help, because firms will come to the country if the others do

What is seen as combating/reducing poverty

Increasing mean income/reducing inequality/economic growth

Drivers of poverty

Political conflict, natural disasters, corruptions

Counter-intuitive thing about gdp and natural disasters

They destroy existing wealth, but lead to huge amount of GDP growth

What absolute poverty does not inform about

it doesn't show the ability to participate in the society

Who is responsible for raising relative poverty

The rich

Equality of opportunity

Achieved if circumstances do not matter in the outcome (only effort)E

Ex-ante concept

Judged in the beginning, without effort

Equality of outcome

Doesn't make a distinction between the deserving and undeserving poor

Ex-post concept

judged after the action has been taken

Intergenerational earnings elasticity

fractions of relative income differences between all adults that is transmitted to their offspring

Interpreting intergenerational elasticity

Higher values indicate a higher persistence of earnings across generations

Components of income

Individual earnings, capital incomes, transfers, disposable income

disposable income

gross income - direct taxes

Level of concept of earnings

individual

Income level of concept

household

How household-based measures conceal the extent of the rise in inequality

Young adults returning to family nest during economic struggles

Household market income formula

Individual earnings + capital incomes + private transfers

Household gross income formula

Household market income + state transfers

Household equivalised disposable income

Household disposable income/n of equivalent adults

Equalisation definitions

adjusting total household incomes for differences in needs in terms of size and composition

Needs and household size

We assume that they rise less than proportionately with household size

Household extended(adjusted) income

Household equalized disposable income + value of public services

Gini comprehension visually

Further the two lines are from each other, the higher the gini coefficient

What does 90/10 ratio do

Compares the two extremes of the income distribution

90/50 income ratio

Compares how the middle class is doing compared to the riches

50/10 ratio meaning

Distribution of income among the relatively poor population

What action can be determined from the 90/10 ratio

How much income should be distributed to the poor

What can be determined from the 90/50 ratio

The distribution of the tax burden among the relatively rich population

What action can be determined from the 50/10 income ratio

To determine who is the relative poverty

Theories that link inequality to negative impacts on economic growth

Endogenous fiscal policy, human capital accumulation theory, lower aggregate demand

Endogenous fiscal policy

Inequality leads to political discontent, resulting in re-distributive policies that harm growth, political instability and unrest

Human capital accumulation theory

Poor people are not able to invest sufficiently in education, which leads to untapped potential for growth

Lower aggregate demand from stagnating/declining incomes of the poor couples with higher income shares of the rich

Rich people have lower propensity to consume and so may rather save than re-invest money

Theories that suggest that inequality is positively related to growth

Higher inequality makes people work harder, higher inequality fosters aggregate savinng

OECD study 2018

Strong negative link between inequality and growth, likely through the human capital accumulation channel

Higher inequality and well-being (Wilkinson and Pickett) (but just correlations)

More health and social problems: life expectancy, mental illness, drug use, obesity

Status anxiety

Inequality places people in a steep hierarchy that increases status competition and so stress

Why did inequality increase in countries of global north

Skill-biased technological changes, globalisation, financialization of core economies

Skill-biased technological change (SBTC) (inequality)

polarization in the labour market, with routine tasks being replaced by computers (squeezing of the middle class)

Stolper-Samuelson theorem

Rich countries export skill-intensive products and import low-sill products (has an impact on demand on wages)

Reasons for national differences

Changing pay norms, reduced role of trade unions, scaling back of the redistributive tax and transfer policy, capital and monopoly power

Why is there a reduced role of trade unions

Skilled workers no longer identify with unskilled workers, globalisation - threat to relocate business

capital and monopoly power (inequality explanation)

winner-takes-all markets - globalisation means bigger markets

CEO pay and performance

Little evidence that they are related

bottom 50% and emissions

Responsible for 12%