ECONOMICS - Test 3 notes

CHAPTER 22 - ECONOMICS OF INEQUALITY AND POVERTY

🔸 Distinguish between equality and equity.

= where economic outcomes are the same for different people or social groups

= it's about fairness - despite their differences, everyone should be given the
same opportuntties

🔸 Explain how income inequality may be measured. Illustrate how the lorenz
curve shows inequality. Construct a Lorenz curve:

▪️Income inequality is measured using the Lorenz curve

▪️ Lorenz curve - takes data about household income gathered and presents
them graphically

▪️ The further away a country's curve is from the line of absolute equality, the
more unequal is the distribution of income

▪️ Lorenz curve - used to compare 2 or more countries in terms of income

distribution or to compare the change in income distribution for one country
over time

🔸 Explain the relationship between the lorenz curve and the gini coefficient:

▪️ Gini coefficient = a statistical measure of the degree of variation represented

in a set of values

▪️Analyses income inequality numerical represantation of the lorenz curve of a

country

▪️ Measures the extent to which the distribution of income deviates from a

perfectty equal distribution

▪️Formula: a / a + b
🔸 Explain the meaning of absolute and relative poverty:

▪️A = when the income of a person /household is not enough for them to meet
basic needs

▪️ R = comparative measure based on the living standards in a country a person

is poor compared to the others in the country those earning 50% less than the
median inome

🔸 Describe the causes of inequality:

1. Inequality of opportunities: opportunities that people face are unequal

▫️Example: a kid growing up in a wealthy family VS poor family

2. Discrimination: inequality results in an unfair treatment / discrimination

against certain people

▫️Example: poor kid VS wealthy kid or wage discrimination

3. Differences in human capital: person's income may be determined by supply

and demand of labour

▫️Example: wages of skilled workers have risen - increasing inequality

4. Globalisation and technological progress have affected different types of

labour differently:

▪️ less demand for manufacturing workers in developed countries -

technological progress => increasing unemployment

▪️income for technological professionals have risen - increased inequality

🔸 Discuss the role of taxation in reducing poverty, income and wealth: Idirect
and indired taxes, progresive and regresive taxes

▪️ Direct taxes = taxes imposed on factor incomes (income and corporation tax)
-may be raised or lowered, change the level of AD (achieve macroeconomics
goals)
▪️ Indirect taxes = imposed on producers / suppliers by the government (VAT,
carbon tax) - may be imposed to reduce consumption of goods creating
negative externalities

▪️ Progressive taxes = as income rises, people pay higher percentage of this

income as tax - Low income earner - small percentage of tax to the
government - High income earners - high percentage of tax to the government

▪️ Regressive taxes = where the average tax burden decreases with income - all
social / income groups pays the same percentage tax to the government take a
larger share of income from lower income people than from higher income
people

🔸 Explain policies available to a government to reduce poverty, income and

wealth-inequality:
▪️ Transfer payments: Income that is transferred from some groups to support
other groups

▫️Types of transfer payment: child maternity, Maternity and paternity benefits

▪️Investment in human capital: Promote equal opportunities

▫️Requires: subsides etc...

▫️Examples of policies- Public health insuarance, School food policies, Improved

access to good-quality child care

▪️ Reduce discrimination: Policies - Laws related salaries and wages, Legislation,

Diversity guotas

▪️ Increased minimum wage rates: The minimum amount of income that an

employer can legally pay a worker
CHAPTER 23 - WHY DO COUNTRTES TRADE

🔸 Define international trade:

= the exchange of goods and services between countries

🔸 Identify and explain the gains from trade:

▪️Lower prices: ability to buy goods and services at a lower price

▫️ consumers- buy less expensive products firms-> purchase cheaper raw

material / semi-manufactured goods

▪️ Greater choice: consumers are able to have a greater choice of products

access to products from other countries

▪️Increased competition: domestic firms compete with foreign firms

▫️greater efficiency - consumers gain by being offered less expensive goods and
services and quality and variety will increase

▪️ Economies of scales: size of the market (and demand) will increase ➡️level
and size of production will increase

▫️ provide scope for economies of scale to be achieved + production becomes

more efficient

🔸 Discuss the limitations of comparative advantage theory:

▪️ Producers and consumers have perfect knowledge and are aware of where
the least expensive goods may be purchased

▪️No transport costs - transport costs exist not making trade worthwhile

▪️ Costs do not change and returns to scale are constant - existence of

economies of scale would increase a country's comparative advantage

▪️Perfectly free trade among countries - likely to be government trade barriers

🔸 Define, explain, illustrate and give examples of absolute and comparative
advantage:

▪️ A = one country can produce more of a product than another country with a
given level of resources

▫️ a country is said to have an absolute advantage in the production of goods if

it can produce it using fewer resources than another country

▪️ C = the opportunity cost of producing a good is lower for one country than
the other

▫️a country is said to have a comparative advantage in the production of goods

if it can produce the good at a lower opportunity cost than another country