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Poverty, Inequality And Vulnerability Notes
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POVERTY, INEQUALITY & VULNERABILITY 'Development Economics' Ray 1998 (Ch. 6-7)
Economic inequality o Measurement
Four criteria of inequality measurement
Anonymity principle - does not matter who is earning the income o Means that we can always arrange our income distribution so that:
distribution, the former should be judged to be more unequal than the latter.' o An inequality measure is consistent with the Lorenz criterion if and only if it is simultaneously consistent with the anonymity, population, relative income and Dalton principles.
If Lorenz curves cross: o Lorenz criterion doesn't apply o There are both progressive and regressive transfers occurring
Complete measures of inequality
m incomes, in each income class, j, the number of individuals earning that income is denoted by nj
Mean Absolute Deviation o o Inequality is proportional to distance from the mean income o BUT often insensitive to Dalton Principle - M only changes with income transfers from income below the mean to above the mean (not from a low income below the mean to a higher income below the mean)
The coefficient of variation o o Lorenz consistent, satisfies Dalton principle o C increases when regressive transfer is made
Gini coefficient o Takes difference between all pairs of incomes and totals the absolute differences o o Lorenz consistent o It is precisely the ratio of the area between the Lorenz curve and the diagonal line of perfect equality, to the area of the triangle below the diagonal line
If Lorenz curves cross, Gini and coefficient of variation may give contradictory rankings. Inequality and development: interconnections o 'Savings rates are severely affected at low levels of income; so is the capacity to do useful work.' o 'given today's distribution of endowments and today's economic interaction in the marketplace, we generate a new distribution of endowments for tomorrow.'
'In this sense today's distribution of wealth spawns, via economic interaction, tomorrow's distribution of wealth, and the process repeats itself endlessly over time and over generations.'
'Thus economic growth and economic inequality and evolve together.' o Inequality, income and growth
The inverted-U hypothesis
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