101 lecture 20 income inequality and poverty

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101 lecture 20 income inequality and poverty

  1. 1. Next Exam ! Exam 6 Thursday December 26 ! Chapters 18, 19, 20 and 21
  2. 2. Microeconomics Lecture 20 ! Income Inequality and Poverty
  3. 3. The internet is the most powerful idea creation and testing factory
  4. 4. Ideas Grow Faster than Population Patents Population 600 Ideas grow exponentially 500 400 300 200 100 0 1963 1966 1969 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 2011
  5. 5. The Power of Compounding Rate/ Period 0 1 2 3 4 5 6 7 8 9 10 2% 1.00 1.02 1.04 1.06 1.08 1.10 1.13 1.15 1.17 1.20 1.22 5% 1.00 1.05 1.10 1.16 1.22 1.28 1.34 1.41 1.48 1.55 1.63 10% 1.00 1.10 1.21 1.33 1.46 1.61 1.77 1.95 2.14 2.36 2.59 25% 1.00 1.25 1.56 1.95 2.44 3.05 3.81 4.77 5.96 7.45 9.31 50% 1.00 1.50 2.25 3.38 5.06 7.59 11.39 17.09 25.63 38.44 57.67 100% 1.00 2.00 4.00 8.00 16.00 32.00 64.00 128.00 256.00 512.00 1,024.00
  6. 6. The Power of Compounding 1200 Rate/ Period 2 3 4 5 6 7 8 9 10 1.00 1.02 1.04 1.06 1.08 1.10 1.13 1.15 1.17 1.20 1.22 5% 1.00 1.05 1.10 1.16 1.22 1.28 1.34 1.41 1.48 1.55 1.63 10% 1.00 1.10 1.21 1.33 1.46 1.61 1.77 1.95 2.14 2.36 2.59 25% 1.00 1.25 1.56 1.95 2.44 3.05 3.81 4.77 5.96 7.45 9.31 50% 1.00 1.50 2.25 3.38 5.06 7.59 11.39 17.09 25.63 38.44 57.67 100% 600 1 2% 900 0 1.00 2.00 4.00 8.00 16.00 32.00 64.00 128.00 256.00 512.00 1,024.00 300 0 0 1 2 3 4 5 6 7 8 9 10
  7. 7. Intellectual Human Entrepreneur Culture Financial Physical
  8. 8. What capital was used to create the iPhone? Why wasn’t the iPhone created in Syria?
  9. 9. Income is unequal
  10. 10. Remember: income must be created before it can be distributed or redistributed
  11. 11. Earning Income Who makes it Distributing Income Who gets it ! !
  12. 12. Distributing Income Earner distributes it Redistributing Income Government takes from earner and distributes ! !
  13. 13. Fairness
  14. 14. Fairness is not an objectively determined concept Milton Friedman (1912 - 2006)
  15. 15. Fairness Two Definitions
  16. 16. Redistributive Fairness It is fair to equalize rewards. Inequality is inherently unfair.
  17. 17. Meritocratic Fairness Fairness means matching reward to merit. ! Forced equality is inherently unfair
  18. 18. The worst form of inequality is to try to make unequal things equal. ! – Aristotle
  19. 19. THE REAL QUESTION is not whether fairness matters it does... but which definition is correct for public policy.
  20. 20. Quiz 1. What is Redistributive Fairness? ! 2. What is Meritocratic Fairness?
  21. 21. How you slice the pie Culture determines the size of the pie !
  22. 22. China switched the fairness definition in1989
  23. 23. Quintile Line up by income One-Fifth
  24. 24. Income Inequality by Quintile Middle East North Africa (MENA) 50% 45% 45% 40% Percent of Income 35% 30% 25% Perfect Equality 20% 21% 15% 15% 10% 5% 0% 11% 8% Bottom 20% 4th 20% 3rd 20% 2nd 20% Top 20%
  25. 25. Poverty Line A level of income set by the government below which is deemed to be in poverty
  26. 26. Poverty Rate The percentage of the population living below the poverty line
  27. 27. Percent Below Poverty Line Egypt 20 Gaza 70 Iran 18 Iraq 25 Jordan 14 Syria 12 UAE 19 Yemen 45
  28. 28. The Income Lifecycle Peak at 50 Earning Varies + $0 Born Level Spending Go to Work Retire Age Die
  29. 29. Unadjusted Income Consumption Gap Top 20% to Bottom 20% 15 x After Taxes 14 x Consumption 4x Household Size 2x
  30. 30. What percent of millionaires inherited their wealth? 20% Inherited 80% Earned
  31. 31. What would you rather be? Rich in poor country or Poor in a rich country
  32. 32. Who is richer?
  33. 33. Price Drop since 1953 - 90 Percent
  34. 34. Price Drop since 1953 - 90 Percent
  35. 35. Contact Lenses 1971 95 hours 1997 4 hours - 96%
  36. 36. 1954 30,000 SAR 2013 3,000 SAR
  37. 37. 2013 vs. 1953 Cell Phone Internet Air Conditioner Jet Travel Medicine Entertainment Car Housing Food Opportunities
  38. 38. Your Income Average Income A 100,000 100,000 B 200,000 300,000 C 50,000 25,000 Absolute or Relative?
  39. 39. What should the government do about income inequality?
  40. 40. Government can make income more equal Distorts incentives Alters behavior Less efficient allocation
  41. 41. How much inequality? What can government do? How to help the poor
  42. 42. Utilitarianism the government tries to maximize total utility
  43. 43. Utility a measure of happiness or satisfaction
  44. 44. If you take from the rich and give to the poor both have less incentive to work
  45. 45. If you take 25% from the A student and give to the F student both have less incentive to study
  46. 46. Libertarianism the government should enforce contracts and punish crimes but not redistribute income
  47. 47. Libertarianism the process is more important than the outcomes
  48. 48. Libertarianism if the process is just then the outcome is fair regardless of the inequality

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