1 © ©1999 South-Western College Publishing PowerPoint Slides prepared by Ken Long Principles of Economics 2nd edition by Fred M Gottheil

2 Chapter 18 Income Distribution & Poverty 2/17/2016 © ©1999 South-Western College Publishing

3 This chapter discusses principles associated with The Case for Income InequalityThe Case for Income Equality © ©1999 South-Western College Publishing Rawls’s Theory of Justice The Gini CoefficientThe Lorenze Curve Poverty Thresholds Negative Income Tax

4 What are the different ways of making income? Wages Interest Rent Profit © ©1999 South-Western College Publishing

5 What are some techniques used to measure income distribution? The Lorenze Curve Gini Coefficient © ©1999 South-Western College Publishing

6 What is the Lorenze Curve? Shows the percentage of total income received by a given percentage of recipients whose incomes are arranged from smallest to largest © ©1999 South-Western College Publishing

7 Lorenz Curve Cumulative % of population Perfect Income Equality Cumulative Percent of Income © ©1999 South-Western College Publishing

8 What is the Gini Coefficient? A numerical measure of the degree on income inequality in an economy © ©1999 South-Western College Publishing

9 What does the Gini Coefficient have to do with the Lorenze Curve? The coefficient transforms the Lorenze Curve into a numerical value © ©1999 South-Western College Publishing

10 Cumulative % of population Cumulative Percent of Income A B Areas produced by the Lorenze Curve G = A/(A+ B) © ©1999 South-Western College Publishing

11 With the Gini Coefficient, what do the #’s mean? A number of 0 is perfect income equality A number of 1 is perfect income inequality © ©1999 South-Western College Publishing

12 The Bureau of the Census provides income & poverty information © ©1999 South-Western College Publishing

13 What is Wealth? The accumulated assets owned by individuals © ©1999 South-Western College Publishing

14 What is Life Cycle Wealth? Wealth in the form of nonmonetary assets, such as a house, automobiles, and clothing © ©1999 South-Western College Publishing

15 What are some reasons to justify Income Equality? The randomness of personal misfortune is a misfortune Rawls’s Theory of Justice There’s nothing random about inequality Equality and maximum utility © ©1999 South-Western College Publishing

16 How is “randomness of misfortune” used to justify equality? Families may be poor because of a personal misfortune, such as disease or death. © ©1999 South-Western College Publishing

17 How does Rawls make the case for equality? He argues that most people would choose equality over the risk of ending up poor. © ©1999 South-Western College Publishing

18 Who argues that “there’s nothing random about inequality”? Socialists and Marxists who say that property and the income from it are theft. © ©1999 South-Western College Publishing

19 How is the law of diminishing marginal utility of money used to justify equality? It shows that society’s total utility is maximized with income equality © ©1999 South-Western College Publishing

20 For more information about income equality: © ©1999 South-Western College Publishing docs/erp/ /rawls.html on_debate.html

21 What are the cases for Income Inequality? Efficiency Economic Growth © ©1999 South-Western College Publishing

22 Why is efficiency linked to inequality? People provide maximum productive effort only if they are rewarded for it. © ©1999 South-Western College Publishing

23 What is the “Economic Growth” argument? Because the wealthy can afford to save, a high savings rate makes possible money for investments © ©1999 South-Western College Publishing

24 What is Median Income? The midpoint of a society’s income distribution © ©1999 South-Western College Publishing

25 What is the Poverty threshold? The level of income below which families are considered to be poor © ©1999 South-Western College Publishing

26 How do we define Poverty? As a % of median income Meeting basic needs standard © ©1999 South-Western College Publishing

27 How many people in the U.S. live in poverty? Poor families make up a little more than 10% of the population © ©1999 South-Western College Publishing

28 How does the Government help the Poor? Cash assistance In-kind assistance © ©1999 South-Western College Publishing

29 What is the Negative Income Tax? Government payments to the poor designed to provide them with a minimum level of after- tax income. © ©1999 South-Western College Publishing

30 What is the Lorenze Curve? What is the Gini Coefficient? What are some reasons to justify Income Equality?What are some reasons to justify Income Equality? What are the cases for Income Inequality?What are the cases for Income Inequality? What is Median Income? How do we define Poverty? What is a Negative Income Tax?

31 ENDEND © ©1999 South-Western College Publishing