A-Level Economics Notes on Inequality

Definitions

  1. Inequality: The unequal distribution of economic resources, such as income and wealth, among individuals, groups, or populations within a society or between countries.
  2. Income Inequality: A measure of the extent to which income is distributed unevenly in a given population.
  3. Wealth Inequality: A measure of the disparity in the distribution of assets, including money, real estate, and stocks, among individuals in a population.
  4. Gini Coefficient: A statistical measure of distribution, which is a number between 0 and 1 that represents the inequality among values of a frequency distribution (for example, levels of income).
  5. Lorenz Curve: A graphical representation of the distribution of income or wealth within a community, showing the proportion of the total income or wealth that is cumulatively earned or owned by the bottom x% of the people.
  6. Quintile: A statistical value of a data set that represents 20% of a given population. The population is divided into five quintiles.
  7. Decile: A statistical value of a data set that represents 10% of a given population. The population is divided into ten deciles.
  8. Palma Ratio: A measure of income inequality that compares the share of income received by the top 10% of earners with that received by the bottom 40%.
  9. Theil Index: An economic statistic that measures economic inequality, showing the disparity in a distribution, such as income or wealth.
  10. Multidimensional Poverty Index (MPI): An international measure of acute poverty covering over 100 developing countries. It complements traditional income-based poverty measures by considering multiple deprivations in health, education, and living standards.
  11. Human Development Index (HDI): A composite index measuring average achievement in three basic dimensions of human development: a long and healthy life, knowledge, and a decent standard of living.
  12. Gender Inequality Index (GII): A measure reflecting women’s disadvantage in three dimensions: reproductive health, empowerment, and the labor market for as many countries as data of reasonable quality are available.
  13. Progressive Taxation: A tax system in which the tax rate increases as the taxable amount increases, often considered as a tool for reducing income inequality.
  14. Regressive Taxation: A tax system where the tax rate decreases as the taxable amount increases, which can increase inequality.
  15. Proportional Taxation: A tax system where the tax rate is fixed and does not change with the taxable amount, which can maintain the status quo of inequality.
  16. Absolute Poverty: A condition characterized by the severe deprivation of basic human needs, including food, safe drinking water, sanitation facilities, health, shelter, education, and information.
  17. Relative Poverty: A condition where household income is a certain percentage below median incomes, hence, relative to the standard of living in a society at a specific time.
  18. Social Mobility: The movement of individuals, families, or groups through a system of social hierarchy or stratification.
  19. Redistribution of Income: Government policies designed to adjust the distribution of income, such as through taxation and welfare programs, to achieve a more equitable society.
  20. Capital Accumulation: The growth in wealth of an individual or household from either savings or investment of savings.
  21. Market Income: Income received by individuals or households before any taxes are paid or government benefits received.
  22. Disposable Income: Income available after paying taxes and receiving government welfare payments, which can be spent or saved by households.

Causes and Consequences of Inequality

Causes of High Inequality

  1. Structural Factors:
    • Economic structure favoring industries that require high skill levels, leading to wage disparities.
    • Uneven access to quality education and healthcare, which perpetuates income and wealth gaps.
  2. Policy Decisions:
    • Tax policies that disproportionately benefit the wealthy.
    • Inadequate social safety nets for the poor.
  3. Market Forces:
    • Globalization leading to higher rewards for skilled workers versus unskilled labor.
    • Technological changes that create a demand for higher-skilled employees.
  4. Socio-Political Factors:
    • Historical patterns of discrimination based on race, gender, or ethnicity.
    • Political power imbalances that result in policies favoring the elite.
  5. Capital Accumulation:
    • Concentration of capital among the wealthy, who can invest in assets that appreciate faster than wages.

Consequences of High Inequality

  1. Economic Impacts:
    • Reduced consumer spending potential, affecting overall demand and economic growth.
    • Inefficient allocation of resources as the wealthy may invest in less productive assets.
  2. Social Impacts:
    • Increased social tensions and political instability.
    • Higher rates of crime and social unrest.
  3. Health and Education:
    • Poorer health outcomes and lower life expectancy in more unequal societies.
    • Educational disparities that hinder human capital development.
  4. Impact on Governance:
    • Erosion of trust in institutions and governance challenges.
    • Policies that may continue to favor the wealthy due to their influence on political processes.
  5. Development Challenges:
    • Inequality can lead to a vicious cycle of poverty and underdevelopment.
    • Difficulty in mobilizing domestic resources for development due to a narrow tax base.

Measurements for Inequality: Gini Coefficient and Lorenz Curve

Gini Coefficient

  1. Concept:
    • The Gini Coefficient is a single number aimed at measuring the degree of inequality in a distribution.
    • It summarizes the dispersion of income or wealth within a population or country.
  2. Calculation:
    • Derived from the Lorenz Curve, it is calculated as the ratio of the area between the line of perfect equality and the observed Lorenz Curve over the total area under the line of perfect equality.
  3. Interpretation:
    • A Gini Coefficient of 0 expresses perfect equality where everyone has the same income or wealth.
    • A Gini Coefficient of 1 expresses maximal inequality where only one person has all the income or wealth.
  4. Usage:
    • Widely used by economists to gauge economic inequality.
    • Helps in comparing inequality across different populations or over time within the same population.
  5. Limitations:
    • Does not reflect the actual distribution of income or wealth—two countries with the same Gini Coefficient can have different underlying distributions.
    • Insensitive to changes in different parts of the income distribution.

Lorenz Curve

  1. Concept:
    • The Lorenz Curve is a graphical representation that shows the proportion of the total income of a population that is cumulatively earned by the bottom x% of the population.
  2. Features:
    • The x-axis measures the cumulative percentage of households, and the y-axis measures the cumulative percentage of income.
    • The 45-degree line represents perfect equality.
  3. Analysis:
    • The extent to which the Lorenz Curve sags below the line of equality indicates the degree of inequality in the distribution.
    • The curve allows for visual analysis of the distribution of income or wealth.
  4. Policy Utility:
    • It helps policymakers visualize and measure the impact of inequality.
    • Used to assess the effectiveness of social and economic policies on reducing inequality.
  5. Comparative Utility:
    • Enables comparison between countries or regions.
    • Useful for illustrating changes over time within a given economy, especially before and after policy changes.

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