Poverty and Inequality Sherif Khalifa Sherif Khalifa () Poverty and Inequality 1 / 44
Sherif Khalifa () Poverty and Inequality 2 / 44
Sherif Khalifa () Poverty and Inequality 3 / 44
Definition Income inequality is the disproportionate distribution of total national income among households. All Rich Poor Income $1000 $900 $100 Population 100 10 90 Income per capita $10 $90 $1.1 Income $1100 $1000 $100 Population 100 10 90 Income per capita $11 $100 $1.1 Sherif Khalifa () Poverty and Inequality 4 / 44
If income growth is generated by the rich, they would appropriate it, progress against povert would slow and inequality would worsen. If income growth is generated by the poor, they would be its principal beneficiaries and the fruits of economc growth would be shared more evenly. Developing countries discovered that economic growth brought little benefits to the poor. The elimination of widespread povert and income inequality are at the core of all development problems. Sherif Khalifa () Poverty and Inequality 5 / 44
Personal Distribution Definition Personal distribution of income is the share of the total income accruing to the poorest specific percentage or the richest specific percentage of a population without reagrd to the sources of that income. It deals with individuals and the total incomes they receive, regardless of the source. Arrange all individuals by ascending personal incomes. Divide the total population into quintiles (20% of the population) or deciles (10% of the population). Determine what proportion of the total national income accrue to each income group. Sherif Khalifa () Poverty and Inequality 6 / 44
Personal Distribution Sherif Khalifa () Poverty and Inequality 7 / 44
Personal Distribution income received by top 20% Kuznets ratio = income received by bottom 40% = 51% 14% = 3.64 Sherif Khalifa () Poverty and Inequality 8 / 44
Lorenz Curve Definition The Lorenz curve is a graph depicting the variance of the size distribution of income from perfect equality. The horizontal axis shows the number of income recipients in cumulative percentages. The vertical axis shows the share of total income received by each percentage of population. The curve shows the actual quantitative relationship between the percentage of income they receive during a year. The diagonal line is representative of perfect equality in size distribution of income. The more the Lorenz curve is away from the diagonal, the greater the degree of inequality represented. Sherif Khalifa () Poverty and Inequality 9 / 44
Lorenz Curve Sherif Khalifa () Poverty and Inequality 10 / 44
Lorenz Curve Individuals A B 1 $1 $0.5 2 $2 $1.5 3 $4 $2 4 $5 $3 5 $7 $5 6 $10 $7 7 $11 $8 8 $15 $10 9 $20 $15 10 $25 $48 Total $100 $100 Cumulative A B 10% 1% 0.5% 20% 3% 2% 30% 7% 4% 40% 12% 7% 50% 19% 12% 60% 29% 19% 70% 40% 27% 80% 55% 37% 90% 75% 52% 100% 100% 100% Sherif Khalifa () Poverty and Inequality 11 / 44
Lorenz Curve 100% 90% 80% 70% 60% 50% % of income 40% 30% 20% 10% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% % of income recipients Sherif Khalifa () Poverty and Inequality 12 / 44
Lorenz Curve 100% 90% 80% 70% 60% 50% % of income 40% 30% 20% 10% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% % of income recipients Sherif Khalifa () Poverty and Inequality 13 / 44
Lorenz Curve 100% 90% 80% 70% A 60% 50% % of income 40% 30% 20% 10% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% % of income recipients Sherif Khalifa () Poverty and Inequality 14 / 44
Lorenz Curve 100% 90% 80% 70% A 60% 50% % of income 40% 30% 20% 10% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% % of income recipients Sherif Khalifa () Poverty and Inequality 15 / 44
Lorenz Curve 100% 90% 80% 70% 60% A B 50% % of income 40% 30% 20% 10% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% % of income recipients Sherif Khalifa () Poverty and Inequality 16 / 44
Lorenz Curve Sherif Khalifa () Poverty and Inequality 17 / 44
Lorenz Curve Whenever one Lorenz curve intersects another, it is diffi cult to determine which economy has an income distribution that is more equal. Sherif Khalifa () Poverty and Inequality 18 / 44
Gini Coeffi cient Definition The Gini coeffi cient can be obtained by calculating the ratio of the area between the diagonal line and the Lorenz curve divided by the total area of the half-square in which the curve lies. The higher the value of the coeffi cient is, the higher the inequality of income distribution; the lower it is, the more equal the distribution of income. Sherif Khalifa () Poverty and Inequality 19 / 44
Gini Coeffi cient Sherif Khalifa () Poverty and Inequality 20 / 44
Functional Distribution Definition Functional or factor share distribution of income attempts to explain the share of total national income that each of the factors of production receives. The functional distribution of income is the distribution of income to factors of production without regard to the ownership of the factors. Definition Factors of production are resources or inputs required to produce a good or a service, such as land, labor and capital. Sherif Khalifa () Poverty and Inequality 21 / 44
Functional Distribution Sherif Khalifa () Poverty and Inequality 22 / 44
Functional Distribution Wage 10 9 8 7 6 5 4 3 2 1 0 1 2 3 4 5 6 7 8 9 Labor Sherif Khalifa () Poverty and Inequality 23 / 44
Functional Distribution Wage 10 9 8 7 6 5 4 3 2 1 0 1 2 3 4 5 6 7 8 9 Labor Sherif Khalifa () Poverty and Inequality 24 / 44
Functional Distribution Wage Supply 10 9 8 7 6 5 4 3 2 1 0 Demand 1 2 3 4 5 6 7 8 9 Labor Sherif Khalifa () Poverty and Inequality 25 / 44
Functional Distribution Wage Supply 10 9 8 7 6 5 4 3 2 1 0 Demand 1 2 3 4 5 6 7 8 9 Labor Sherif Khalifa () Poverty and Inequality 26 / 44
Functional Distribution Wage Supply 10 9 8 7 6 5 4 3 2 Wage 1 0 Demand 1 2 3 4 5 6 7 8 9 Labor Sherif Khalifa () Poverty and Inequality 27 / 44
Functional Distribution 12 Wage Supply 10 9 8 7 6 Profit 5 4 3 2 Wage 1 0 Demand 1 2 3 4 5 6 7 8 9 Labor Sherif Khalifa () Poverty and Inequality 28 / 44
Functional Distribution Wage = 4 (4) = $16 ( ) 1 Profit = (4) (8) = $16 2 Income = Wage + Profit = 16 + 16 = $32 Income share of workers = 16 32 = 1 2 Income share of capitalists = 16 32 = 1 2 Sherif Khalifa () Poverty and Inequality 29 / 44
The higher the inequality the smaller the fraction of the population that qualifies for credit to educate their children or expand business. With high inequality, the rate of saving tends to be low because the highest rate of marginal savings is found among the middle class. The rich spend their incomes on imported luxury goods, and send their savings abroad. Income disparities undermine social stability and solidarity. Income inequality strengthens the political power of the rich and hence their economic bargaining power. Inequality may lead the poor to support populist policies which can set back development progress. Extreme inequality has an adverse impact on incentives. Sherif Khalifa () Poverty and Inequality 30 / 44
Sherif Khalifa () Poverty and Inequality 31 / 44
Kuznet s Curve Definition The Kuznets curve is a graph reflecting the relationship between a countrys income per capita and its inequality of income distribution. Sherif Khalifa () Poverty and Inequality 32 / 44
Kuznet s Curve Sherif Khalifa () Poverty and Inequality 33 / 44
Kuznet s Curve Sherif Khalifa () Poverty and Inequality 34 / 44
Sherif Khalifa () Poverty and Inequality 35 / 44
Sherif Khalifa () Poverty and Inequality 36 / 44
Absolute Poverty Definition Absolute poverty is the situation of being unable or only barely able to meet the subsistence essentials of food, clothing and shelter. Definition The extent of absolute poverty is the number of people who are unable to command suffi cient resources to satisfy basic needs. They are counted as the total number living below a specified minimum level of real income known as an international poverty line. Sherif Khalifa () Poverty and Inequality 37 / 44
Absolute Poverty Definition The headcount index is the proportion of a country s population living below the poverty line. Head count index = H N H: head count of those whose incomes fall below the absolute poverty line. N: total population. Sherif Khalifa () Poverty and Inequality 38 / 44
Absolute Poverty Definition Total poverty gap measures the total amount of income necessary to raise everyone who is below the poverty line up to that line. Total poverty gap is the sum of the difference between the poverty line and actual income levels of all people living below that line. Sherif Khalifa () Poverty and Inequality 39 / 44
Absolute Poverty Y i : income of the i th person. Y p : poverty line. N: population. Total poverty gap: Average poverty gap: TPG = H (Y p Y i ) i=1 APG = TPG N Average income shortfall tells us the average amount by which the income of a poor person falls below poverty line: AIS = TPG H Sherif Khalifa () Poverty and Inequality 40 / 44
Absolute Poverty Individuals Country A Country B 1 355 366 2 265 115 3 400 165 4 215 65 3 3 H/N 4 4 TPG 260 750 260 750 APG 4 = 65 4 = 187.5 260 750 AIS 3 = 86.7 3 = 250 Sherif Khalifa () Poverty and Inequality 41 / 44
Absolute Poverty Sherif Khalifa () Poverty and Inequality 42 / 44
Absolute Poverty Sherif Khalifa () Poverty and Inequality 43 / 44
Absolute Poverty Sherif Khalifa () Poverty and Inequality 44 / 44