1 income distribution of income the way income is allocated among the population the way income is...

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IncomeIncome

Distribution of IncomeDistribution of Income The way income is allocated among The way income is allocated among

the populationthe population

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IncomeIncome

Income sourcesIncome sources Payment for a factor of productionPayment for a factor of production GiftsGifts Government transfersGovernment transfers

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IncomeIncome

Lorenz CurveLorenz Curve A geometric representation A geometric representation

of the distribution of incomeof the distribution of income A Lorenz curve that is perfectly straight A Lorenz curve that is perfectly straight

represents complete income equalityrepresents complete income equality The more bowed a Lorenz curve, the more The more bowed a Lorenz curve, the more

unequally income is distributedunequally income is distributed

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The Lorenz CurveThe Lorenz Curve

Figure 30-1

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Lorenz Curves of Income Distribution, Lorenz Curves of Income Distribution, 1929 and 19961929 and 1996

Figure 30-2

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IncomeIncome

Criticisms of the Lorenz curveCriticisms of the Lorenz curve It does not include It does not include income in kindincome in kind..

Income received in the form of goods and Income received in the form of goods and servicesservices

It does not account for the differences in It does not account for the differences in size of households or the number of wage size of households or the number of wage earners they contain.earners they contain.

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IncomeIncome

Criticisms of the Lorenz curveCriticisms of the Lorenz curve It does not account for age differences.It does not account for age differences. It ordinarily reflects money income It ordinarily reflects money income before before

taxes.taxes. It does not measure unreported income.It does not measure unreported income.

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Income Group 1996 1973 1960 1947

Lowest fifth 4.5 5.5 4.8 5.1

Second fifth 10.5 11.9 12.2 11.8

Third fifth 17.1 17.5 17.8 16.7

Fourth fifth 24.1 24.0 24.0 23.2

Highest fifth 43.9 41.1 41.3 43.3

Percentage Share of Money IncomePercentage Share of Money Incomefor Households Before Direct Taxesfor Households Before Direct Taxes

Does not include food stamps,housing, education, etc.

Source: U.S. Bureau of the Census

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International Example:International Example:Relative Income Inequality Relative Income Inequality

Throughout the Richest of CountriesThroughout the Richest of Countries

According to the World Bank, the United According to the World Bank, the United States has the greatest amount of income States has the greatest amount of income inequality of any of the major industrialized inequality of any of the major industrialized nations.nations.

Should something be done about such Should something be done about such income inequality?income inequality?

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Relative Income Inequality in the WorldRelative Income Inequality in the World

Figure 30-3 Source: World Bank

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IncomeIncome

The distribution of wealthThe distribution of wealth The distribution of income is not the same as the The distribution of income is not the same as the

distribution of wealth.distribution of wealth. A complete concept of wealth would include A complete concept of wealth would include

tangible objects, such as buildings, machinery, tangible objects, such as buildings, machinery, cards, houses—nonhuman wealth—as well as cards, houses—nonhuman wealth—as well as people who have skills, knowledge, initiative, people who have skills, knowledge, initiative, talents, and so on—human wealth.talents, and so on—human wealth.

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Measured Total Wealth DistributionMeasured Total Wealth Distribution

Figure 30-4 Source: Board of Governors of the Federal Reserve

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Determinants of Income Determinants of Income DifferencesDifferences

AgeAge Age-Earnings CycleAge-Earnings Cycle

The regular earnings profile of an individual The regular earnings profile of an individual throughout his or her lifetimethroughout his or her lifetime

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Age-earnings cycleAge-earnings cycle At age 18, earnings from wage are relatively At age 18, earnings from wage are relatively

low.low. Earnings gradually rise until they peak at Earnings gradually rise until they peak at

about age 50.about age 50. Earnings then fall until retirement, when they Earnings then fall until retirement, when they

become zero.become zero.

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Typical Age-Earnings ProfileTypical Age-Earnings Profile

Figure 30-5

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Marginal productivityMarginal productivity TalentTalent ExperienceExperience TrainingTraining Investment in human capitalInvestment in human capital

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InheritanceInheritance 10% of inequality traced to inheritance10% of inequality traced to inheritance

DiscriminationDiscrimination Different pay for equal MRPDifferent pay for equal MRP Equal pay for different MRPEqual pay for different MRP

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Access to educationAccess to education Non-white urban males income is reduced Non-white urban males income is reduced

23–27% because of low quality education23–27% because of low quality educationDiscriminationDiscrimination

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Removing Racial Barriers:Removing Racial Barriers:The Colourful but Colour-Blind The Colourful but Colour-Blind

InternetInternetThe Internet can be anonymous so far as The Internet can be anonymous so far as the racial, gender, or ethnic characteristics the racial, gender, or ethnic characteristics of buyers and sellers are concerned.of buyers and sellers are concerned.

For African-American entrepreneurs the For African-American entrepreneurs the Internet is providing a means of avoiding Internet is providing a means of avoiding lost income opportunities based on their lost income opportunities based on their race.race.

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Removing Racial Barriers:Removing Racial Barriers:The Colourful but Colour-Blind The Colourful but Colour-Blind

InternetInternetCultural affinity hypothesisCultural affinity hypothesis An explanation of why race or other factors An explanation of why race or other factors

might affect people’s choicesmight affect people’s choicesLenders may find it less costly to evaluate persons Lenders may find it less costly to evaluate persons who share similar backgrounds.who share similar backgrounds.

Borrowers may prefer to apply at banks that are Borrowers may prefer to apply at banks that are owned and managed by persons who have similar owned and managed by persons who have similar characteristics.characteristics.

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Doctrine of Comparable WorthDoctrine of Comparable Worth The belief that women should receive The belief that women should receive

the same wages as men if the levels the same wages as men if the levels of skill and responsibility in their jobs of skill and responsibility in their jobs are equivalentare equivalent

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Theories of Desired Income Theories of Desired Income DistributionDistribution

ProductivityProductivity ““To each according to what he or she To each according to what he or she

produces.”produces.”

EqualityEquality ““To each exactly the same.”To each exactly the same.”

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Poverty Poverty and Attempts to Eliminate Itand Attempts to Eliminate It

Mass poverty can no longer be said to be Mass poverty can no longer be said to be a problem in the Western world.a problem in the Western world.

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Official Number Official Number of Poor in the United Statesof Poor in the United States

Figure 30-6 Source: U.S. Department of Labor

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International Example:International Example:Poverty Rates in the European UnionPoverty Rates in the European Union

European Union (EU)European Union (EU) Poverty ratePoverty rate

17% of 330 million or 57 million people17% of 330 million or 57 million people

United StatesUnited States Poverty ratePoverty rate

13–15% of 265 million 13–15% of 265 million

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Defining povertyDefining poverty Official poverty level in 2001 for an urban Official poverty level in 2001 for an urban

family of four was $17,650.family of four was $17,650.Adjusted annually for inflationAdjusted annually for inflation

Does not include transfer paymentsDoes not include transfer payments

Higher than the average income Higher than the average income in many countriesin many countries

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Relative Poverty: Comparing Household Relative Poverty: Comparing Household Income and Household SpendingIncome and Household Spending

Source: Bureau of Labor Statistics; U.S. Bureau of the CensusFigure 30-7

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Absolute povertyAbsolute poverty What do you think?What do you think?

Can we eliminate absolute poverty?Can we eliminate absolute poverty?

Relative povertyRelative poverty What do you think?What do you think?

Can we eliminate relative poverty?Can we eliminate relative poverty?

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Health CareHealth Care

America’s health care situationAmerica’s health care situation 14% of total annual income created is 14% of total annual income created is

accounted for by spending on health care.accounted for by spending on health care. Per capita spending on health care is greater Per capita spending on health care is greater

in the United States than anywhere else in the in the United States than anywhere else in the world.world.

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Percentage of Total National IncomePercentage of Total National IncomeSpent on Health Care in the United StatesSpent on Health Care in the United States

Figure 30-8Source: U.S. Department of Commerce; U.S. Department of Health

and Human Services; Deloitte and Touch LLP; VHA, Inc.

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Moral hazard as it affects physicians and Moral hazard as it affects physicians and hospitalshospitals Due to third-party payments, patients do not Due to third-party payments, patients do not

have to worry about the cost of operations have to worry about the cost of operations and medical procedures.and medical procedures.

Physicians and hospitals order more of them Physicians and hospitals order more of them since they are reimbursed on the basis of since they are reimbursed on the basis of medical procedures.medical procedures.

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Countering the moral hazard problem: a Countering the moral hazard problem: a medical savings account (MSAs)medical savings account (MSAs) Combating moral hazardCombating moral hazard

How would MSAs reduce moral hazard?How would MSAs reduce moral hazard?

Could MSAs reduce the quality of health care?Could MSAs reduce the quality of health care?

1 income distribution of income the way income is allocated among the population the way income is...

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