Economics of Poverty & Discrimination Exam 1

Peter Drucker (mgmt author)
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Peter Drucker (mgmt author)
Argued no corporate leader should earn more than 20x the companies lowest paid employee
We have a _____________ System based on _____________.
Market; Incentives
Meaning you work hard = reward
Why are people poor? (Gallup public opinion poll)
(1) Lack of effort (2) Circumstances beyond control (3) Combination of both/I dont know
Theories of Poverty
1. Flawed Character: Poor are to blame, poverty is the natural result of individual defects in aspirations or ability; insufficient amounts of motivation or work ethic.
2. Restricted Opportunity: Poverty results from forces beyond the individuals control
3. Big Brother: Blame the government; destroyed incentives to work, stable families & economic self-sufficiency
Basis for Flawed Character
Human capital- you didn't invest in yourself, or you would have seen the pay off. People who succeed are those who made the necessary investments and those who don't only have themselves to blame. (People are in full control of their socioeconomic status)
Basis for Restricted Opportunity
Restricted access, no amount of effort or work ethic will help. Only way to increase opportunities is to decrease discrimination. Need better access and opportunities.
Basis for Big Brother
Falls in between flawed character and restricted opportunity. They destroy and remove incentives by setting high taxes, providing welfare and having affirmative action programs. This theory implies gov should decrease spending on social programs so responsibility is put back on the people
Economic Mobility
Ability to improve economic status, usually measurable by income. Everyone can be better off & moving up but relative positions may not change.
Social Mobility
Movement between or within social strata in a society, change in social status relative to others. Situation changes, income distribution does not change. (Increase social mobility -> increase education opportunities)
Income
Amount of money receipts a person collects in a year, flow of receipts; reflects market participation
WealthValue of accumulated possessions. Stock of value; reflects economic power (can be converted to income)ConsumptionReflection of current living standardsHow should we measure inequality best? (who)1. Individual 2. Family - people related by blood/marriage 3. Households - one of more people living under the same roof w/ a shared kitchenLorenz CurveRepresents the distribution of income. Looks at the relationship b/w the cumulative % of HH and the cumulative % of income. Divide all the HH into quantiles - each containing 20%, and rank by income level.Perfect Income Equality on the Lorenz curve looks like what?A perfect 45 degree straight line. (each HH receives the same % of income)A bowed out Lorenz curve shows what?Shows an unequal distribution of income, the more bowed out the more unequal the distribution.Gini CoefficientA measure of the degree of inequality in the income distribution.How to calculate the Gini Coefficient (formula)GC= A/(A+B) (Area b/w line of perfect equality and Lorenz curve) / (Entire triangle below line of equality)What is the Gini range?0 to 1 0= total equality 1= total inequality (One person/HH holds all of the income, curve is as far from 45 degree line as possible)As Inequality increases: The more _____________ the Lorenz curve is, and the Gini coefficient _______________.Bowed out; increases in valueGini Coefficient general rule/ (Values for poverty measure)gini < 0.3 = relatively low 0.3 < gini < 0.5 = moderate gini > 0.5 = high used as COMPARATIVE measure, alone these numbers don't tell us enoughThe Gini coefficient is the __________________ measure of inequality. What doesnt it tell us?Most common measure. It doesn't tell us what is happening in individual quantiles. It measures the extent of inequality, tracks it over time, and compares levels across state/economies/regions/countries.Why does inequality exist? (6 reasons)(1) Innate abilities & attributes : not everyone is born w/ same abilities (2) Work & leisure : Trade off b/w work and leisure, some choose to work more and earn more. (also full time vs part time) (3) Education & Training : Increase investment in Human capital, then we assume, an increase an income (4) Risk Taking: Different people have different attitudes toward risk, taking risk could earn higher or lower incomes. Playing it safe, not likely to reach top or bottom of distrib. (5) Luck : Good + bad luck influences income (Usually in the SHORT run) (6) Wage Discrimination : when individuals with equal ability and productivity are paid different wages by same employer.What should a good measure of inequality include?-Be reasonable: a transfer of $ from poor to rich should reflect increasing inequality -Permit comparisons across countries and over time -Should be bounded : can identify difference b/w equality and inequalityPoverty Line: Absolute ApproachConcept of minimum needs, do you have enough income ($) to afford a list of "essential" items to provide for the physical well'being of your family. -List of essentials should not change over time, and should apply to everyone, universally.Poverty Line: Relative Approach-Person is poor when their income is significantly less than the average income of the population. -Uses same % of average income - poor if income is less than 1/2 of AVERAGE income -Says little about the quality of life (distrib. doesn't change b/c everything is relative to others) -Some % WILL ALWAYS BE POORProblem with Relative Poverty Approach?Poverty always exists if inequality existsWhat is a positive aspect of the Relative Poverty Approach?You dont need to go through a list of essential itemsWhat is the improved relative measure?Fuch's Point - developed by Victor Fuch, the former president of the American Economics Association.Fuch's PointPeople poor if they have an income less than 1/2 of the national MEDIAN income. The advantage to this method is that it distinguishes the elimination of poverty from the elimination of inequality. -It is possible to decrease poverty by decreasing inequality, therefore, more realistic.What approach do we use for the Official Poverty Line today?Absolute approach (what is the minimum amount required to sustain a family, minimum needs, and how to make sure each individual can obtain these things)Should purchasing power = money?Income is the best indicator of purchasing power, and we need an adequate flow of money so basic needs can be acquired. (Other measures could be = food stamps, credit, make yourself?)Why do we give food stamps instead of money?-Decreases the incentive to buy non-food items -Decreases the $ you need to hold to buy necessities -More of a way to control what people are spending benefits onWhat is the Poverty Standard?Incorporate the basic needs of an individual for a particular span of time. We express it in terms of amount of income required during that period of time, to make the required purchases.What is the CEA Index?Created by the Council of Economic Advisors, they set the poverty line @ 3,000/year for a typical family (2 adults, 2 kids). Dept of agriculture says that for minimum nutritional standards you need 3 adequate meals per day. ($2.74 per day per HH)What is the Consumer Expenditure Survey (CES) by the BLS?The Bureau of Labor Statistics say low income families spend 2/3 of income on non-food and 1/3 on food. ($2.74 meals x 365 days) = 1000 x 3 = 3,000 per yearWhat is the problem with the CEA Index?It didn't adjust for family size. So it understates poverty for bigger families and overstates it for smaller families.What is the SSA Index?This is the refined CEA Index, developed by Mollie Orshansky of the Social Security Administration. It adds equivalence scales, allows for comparison of different family sizes 7 types. (Added: fan size, far/non-farm, # kids, HOH male/female) -124 different fam types & budgets for each. -Budget doesnt double as number of people doubles; economies of scale exist as HH grows in sizeWhat is the Official Poverty Index Today? (based on + explanation)It is based on absolute needs, but adjusted for inflation and increases in prices. -3x amount needed for 3 meals a day per person. -All based on pre-tax income during a calendar year -24, 936 (2015) - poverty line (allows for $5 a day for food.)What does the Official Poverty Index today not tell us/account for?NOT adjusted for changes in standards of living, differences in cost of living per region, or differences in prices changes for individual goods. DOESN'T tell us how far above/below the line someone is.What is the US Census Survey?A survey conducted every march, asks HH how much income they received last year. It is self-reported, then it is compared to the poverty line.Problems with the US Census Survey? (6)(1) Different Groups Unreported (understates) -Homeless, institutionalized, prisons, poor that live w fan, nursing homes (2) Doesn't include in-kind transfers (overstates) -Food-stamps, medicare, medicaid, housing supp. (3) Unreported Income (overstates) -People may not be truthful, fear increased taxes or decreased benefits, illegal activity, forget, or casual labor (4) Time frame too short (understates) -Based on annual income, things may change during a year which isn't reflected in surveyLatent PoorThey are kept out of poverty measure only by government assistance. They are not poor in official #'s. This is part of the different groups that are not reported.How much do poor families spend in relation to income they report?They usually spend around 2x what they actually report.