1. Copyright 2011 The McGraw-Hill Companies 11-1 Facts About Income Inequality Causes of Income Inequality Equality Versus Efficiency The Economics of Poverty S.A. Government Actions Last Word Key Terms End Show 11 Income Inequality and Poverty

2. Copyright 2011 The McGraw-Hill Companies 11-2 Facts About Income Inequality Causes of Income Inequality Equality Versus Efficiency The Economics of Poverty S.A. Government Actions Last Word Key Terms End Show Chapter Objectives Income Inequality in South Africa The Extent and Sources of Income Inequality The Economic Arguments For and Against Income Inequality How Poverty is Measured and its Incidence by Age, Gender, Ethnicity, and Other Characteristics What is the Government doing to reduce poverty

3. Copyright 2011 The McGraw-Hill Companies 11-3 Facts About Income Inequality Causes of Income Inequality Equality Versus Efficiency The Economics of Poverty S.A. Government Actions Last Word Key Terms End Show Facts About Income Inequality Average Household Income R74,588 in 2005/6 (1) Personal Income – Mean R/Annum (2) Percentage of Income D1 - R4 314 D2 - R9 592 D3 - R13 300 D4 - R17 630 D5 - R22 981 D6 - R30 534 D7 - R43 589 D8 - R69 540 D9 - R128 846 D10 -R405 646 Avg – R74 588 Distribution of S.A. Income by Households, 2005/6 0.14 1.20 2.17 2.87 3.50 4.70 6.36 10.26 17.80 51.00 100.0 Source: Statistics South Africa

4. Copyright 2011 The McGraw-Hill Companies 11-4 Facts About Income Inequality Causes of Income Inequality Equality Versus Efficiency The Economics of Poverty S.A. Government Actions Last Word Key Terms End Show Facts About Income Inequality Lorenz Curve and Gini Ratio The Lorenz Curve 20406080100 20 40 60 80 100 0 Perfect Equality Lorenz Curve (Actual Distribution) Complete Inequality A B a b c d e f Gini Ratio = Area A Area A + Area B Percentage of Households Percentage of Income 11.1

5. Copyright 2011 The McGraw-Hill Companies 11-5 Facts About Income Inequality Causes of Income Inequality Equality Versus Efficiency The Economics of Poverty S.A. Government Actions Last Word Key Terms End Show Facts About Income Inequality Effect of Government Redistribution 20406080100 20 40 60 80 100 0 Lorenz Curve Before Taxes and Transfers Percentage of Households Percentage of Income Lorenz Curve After Taxes and Transfers Impact of Government Taxes and Transfers

6. Copyright 2011 The McGraw-Hill Companies 11-6 Facts About Income Inequality Causes of Income Inequality Equality Versus Efficiency The Economics of Poverty S.A. Government Actions Last Word Key Terms End Show Causes of Income Inequality Ability Education and Training Discrimination Preferences and Risks Unequal Distribution of Wealth Market Power Luck, Connections, and Misfortune

7. Copyright 2011 The McGraw-Hill Companies 11-7 Facts About Income Inequality Causes of Income Inequality Equality Versus Efficiency The Economics of Poverty S.A. Government Actions Last Word Key Terms End Show Causes of Income Inequality Causes of Growing Inequality –Greater Demand for Highly Skilled Workers –Demographic Changes –International Trade, and Immigration

8. Copyright 2011 The McGraw-Hill Companies 11-8 Facts About Income Inequality Causes of Income Inequality Equality Versus Efficiency The Economics of Poverty S.A. Government Actions Last Word Key Terms End Show Causes of Income Inequality GLOBAL PERSPECTIVE Guatemala Brazil South Africa Mexico United States Italy Sweden Germany 0 10 20 30 40 50 48.3 46.9 44.7 43.1 29.9 26.8 22.2 22.1 Source: World Bank, World Development Indicators, 2005 Percentage of Total Income Received by the Top One-Tenth of Income Receivers, Selected Nations

9. Copyright 2011 The McGraw-Hill Companies 11-9 Facts About Income Inequality Causes of Income Inequality Equality Versus Efficiency The Economics of Poverty S.A. Government Actions Last Word Key Terms End Show Equality Versus Efficiency The Case for Equality: Maximizing Total Utility The Case for Inequality: Incentives and Efficiency The Equality-Efficiency Tradeoff

10. Copyright 2011 The McGraw-Hill Companies 11-10 Facts About Income Inequality Causes of Income Inequality Equality Versus Efficiency The Economics of Poverty S.A. Government Actions Last Word Key Terms End Show Equality Versus Efficiency The Utility-Maximizing Distribution of Income Anderson’s Marginal Utility From Income Brooks’ Marginal Utility From Income 00 Marginal Utility Income R5000 R2500 R7500 MU B MU A a a’ b’ b Utility Gain (Entire Blue Area) Utility Loss (Entire Red Area)

11. Copyright 2011 The McGraw-Hill Companies 11-11 Facts About Income Inequality Causes of Income Inequality Equality Versus Efficiency The Economics of Poverty S.A. Government Actions Last Word Key Terms End Show The Economics of Poverty Definition Incidence of Poverty (1) Province (3) % of Population In poverty Eastern Cape Free State Gauteng Kwazulu Natal Limpopo Mpumalanga North West Northern Cape Western Cape South Africa Poverty Indicators by Province (2004) 72 68 42 61 77 57 52 61 32 57 Source: Statistics South Africa (2) No. of Poor Persons (Million) 4.6 1.8 3.7 5.7 4.1 1.8 1.9 0.5 1.4 25.7

12. Copyright 2011 The McGraw-Hill Companies 11-12 Facts About Income Inequality Causes of Income Inequality Equality Versus Efficiency The Economics of Poverty S.A. Government Actions Last Word Key Terms End Show What is Government Doing to Change all this Social Programmes –Old age pension –Disability Pension –Grants Unemployment compensation –UIF Public Works Programmes –Work for Water

13. Copyright 2011 The McGraw-Hill Companies 11-13 Facts About Income Inequality Causes of Income Inequality Equality Versus Efficiency The Economics of Poverty S.A. Government Actions Last Word Key Terms End Show Is South Africa becoming a better place to stay? Last Word Poverty declined ? Increase in Social Grants Public Works contributed Rich is getting richer International poverty Richest 500 people in the world earned more than the poorest 416 million

14. Copyright 2011 The McGraw-Hill Companies 11-14 Facts About Income Inequality Causes of Income Inequality Equality Versus Efficiency The Economics of Poverty S.A. Government Actions Last Word Key Terms End Show Key Terms Income Deciles Lorenz curve Gini ratio income mobility poverty rate Equality Efficiency income inequality poverty unemployment compensationunemployment compensation Government RedistributionGovernment Redistribution Social welfare programmesSocial welfare programmes public work programmespublic work programmes

15. Copyright 2011 The McGraw-Hill Companies 11-15 Facts About Income Inequality Causes of Income Inequality Equality Versus Efficiency The Economics of Poverty S.A. Government Actions Last Word Key Terms End Show Next Chapter Preview… Money, Banking Interest Rates and Monetary Policy