Size distribution of income The greater the degree of inequality, the

more bend and the closer to the bottom

The distribution of income according to size,
horizontal axis will be the Lorenz curve.
class of persons: the share of total income
accruing to say the poorest 40% of a
population or the richest 10%, without regard
Formula: If X is a random variable with Lorenz
to the sources of that income (if it comes
curve LX(F), then −X has the Lorenz curve:
from wages, interest, rent or profits)
L − X = 1 − L X (1 − F)

Functional distribution of income

The distribution of income to factors of

production without regard to the ownership
of the factors.

Solution for Inequality:

When people say things such as “the rich get

richer, and the poor get poorer,” they are
referring to distribution of income. It
describes how all the money (income) earned in
a nation is divided among people of various
income levels.

A good short-run solution would be a

progressive tax system with transfer
payments, such as subsidies, unemployment
benefits and disability benefits. By taxing Why is it important:
higher income groups more than lower-income
The Lorenz curve is important because it
groups, the income can be redistributed from
helps economists measure and understand
the rich to the poor.
income or wealth inequality. Economists are
interested in how income and wealth inequality
changes over time in an economy. It also
Lorenz Curve allows them to compare the level of economic
Named after Conrad Lorenz, an American inequality between different countries.
statistician who in 1905 devised this convenient
and widely used diagram to show the
relationship between population groups and GINI coefficients and aggregate measures of
their respective income shares. inequality

Horizontal axis = % of income recipients
Vertical axis = % of income
Diagonal line from the origin (left hand corner
of the square) to the upper righthand corner)
The more the Lorenz line curves away from
the diagonal (perfect equality), the greater
the degree of inequality.
Named after the Italian statistician C. Gini who
first formulated it in 1912. Gini coefficients are
aggregate inequality measures and can vary
anywhere from zero (perfect equality) to one
(perfect inequality)
The Gini index is a measure of the distribution
of income across a population

• A higher Gini index indicates greater

inequality, with high-income individuals
receiving much larger percentages of the
population’s total income.
• Global inequality, as measured by the Gini
index, has steadily increased over the past
few centuries and spiked during the COVID-
19 pandemic.
• Because of data and other limitations, the
Gini index may overstate income inequality
and can obscure important information
about income distribution.

The Gini index is a measure of the distribution

Understanding the Gini Index
A country in which every resident has the
same income would have an income Gini co-
efficient of 0. Conversely, a country in which
one resident earned all the income, while
everyone else earned nothing, would have an
income Gini co-efficient of 1.
Graphical Representation of the Gini Index
The Gini index is often represented graphically
through the Lorenz curve, which shows income
(or wealth) distribution by plotting the
population percentile by income on the
horizontal axis and cumulative income on the
vertical axis.
The Gini co-efficient is equal to the area below
the line of perfect equality (0.5 by definition)
minus the area below the Lorenz curve, divided
by the area below the line of perfect equality.
In other words, it is double the area between
the Lorenz curve and the line of perfect
equality.
of income across a population. A higher Gini
index indicates greater inequality, with high-
income individuals receiving much larger
percentages of the population's total income.
What country has the highest Gini index?
South Africa, with a Gini co-efficient of 63.0, is
currently recognized as the country with the
highest income inequality. The World Population
Review attributes this massive inequality to
racial, gender, and geographic discrimination,
with white males and urban workers in South
Africa earning much better salaries than
everyone else.
What is the difference between Gini
coefficient and Lorenz curve?
The main difference between the Gini
coefficient and the Lorenz Curve is that the
Gini coefficient helps in measuring the degree
of income inequality and the Lorenz curve
helps in understanding the distribution of
income or wealth in an economy.
The Kuznets Curve Kuznets curve diagrams show an inverted U
curve, although variables along the axes are
expresses a hypothesis advanced by
often mixed and matched, with inequality or
economist Simon Kuznets in the 1950s and
the Gini coefficient on the Y axis and economic
1960s. According to this hypothesis, as an
development, time or per-capita incomes on
economy develops, market forces first
the X axis.
increase and then decrease economic
inequality.

The Kuznets curve appeared to be consistent Hypothetical Kuznets Curve

with experience at the time it was proposed.
However, since the 1960s, inequality has risen in
the US and other developed countries.

What is it used for:

curve used to demonstrate the hypothesis

that economic growth initially leads to greater
inequality, followed later by the reduction of
inequality.

How does the concept of Kuznets waves help
understand the evolution of modern
inequality?
Kuznets's “inverted U-curve” hypothesis
Kuznets (1955) argued that inequality within
nations rises in the early stages of economic
growth, becomes more pronounced at
intermediate levels of development, and
decreases thereafter as countries become
wealthy.
Kuznets ratio and Kuznets curve
The Kuznets ratio is a measurement of the
ratio of income going to the highest-earning
households (usually defined by the upper 20%)
to income going to the lowest-earning
households, which is commonly measured by
either the lowest 20% or lowest 40% of
income.
Comparing 20% to 20%, a completely even
distribution is expressed as 1; 20% to 40%
changes this value to 0.5.
The Kuznets curve implies, nation undergoes
industrialization – and especially the
mechanization of agriculture – the center of
the nation's economy will shift to the cities.
As internal migration by farmers looking for
better-paying jobs in urban hubs causes a
significant rural-urban inequality gap (the
owners of firms would be profiting, while
laborers from those industries would see their
incomes rise at a much slower rate and
agricultural workers would possibly see their
incomes decrease), rural populations decrease
urban populations increase.
Inequality is then expected to decrease when
a certain level of average income is reached
and the processes of industrialization:
democratization and the rise of the welfare
state – allow for the benefits from rapid
growth, and increase the per-capita income.
Kuznets believed that inequality would follow
an inverted "U" shape as it rises and then falls
again with the increase of income per-capita.
Kuznets had two similar explanations for this
historical phenomenon:
• workers migrated from agriculture to
industry;
• rural workers moved to urban jobs.
In both explanations, inequality will decrease
after 50% of the shift force switches over to
the higher paying sector.
Ahluwalia- Chenery Welfare Index
Poverty is a multidimensional concept which
involves natural, social, political, economic,
ethnic, and religious factors and the
measurement of poverty surely extends
beyond the measurement of the minimum
threshold below which an individual fails to avail
the resources required for survival.
Encompassing the perceptions of the poor
becomes fundamental to the determination of
poverty as per the capabilities approach.
Economists, governments, and international
organizations recognize economic growth to be
crucial for the development of the welfare of
the people but a standard growth rate is
considered an incomplete measure of welfare
since welfare is dependent upon many factors
other than income.
Income equality is vital for the health of an
economy. Apart from various measures of
income inequality such as Kuznets' ratio, which
is the ratio of the income received by the top
20% of the population compared to income
received by the bottom 40%, and Gini
coefficients through the Lorenz curve which is
a curve plotted on a graph with percentage of
income on the vertical axis against the
percentage of income recipients on the
horizontal axis along with a line of equality to
represent perfect equality for comparison.
The Ahluwalia-Chenery welfare index is a
method of measuring absolute poverty that
assigns greater weight to income gains by
lower-income individuals.
The Ahluwalia-Chenery welfare index shows
the value judgment implications of using the
change in income per capita as a measure of
welfare.
Absolute poverty refers to the number of
people in a population who do not have the
minimum number of resources to satisfy the
basic survival needs and is generally counted
through a poverty line established at the
income level required to purchase the basket
of basic needs including food, clothing, shelter,
and medical help.
A good poverty measure must possess a few
characteristics which include the anonymity
principle such that it is independent of who is
poor, the scale-independence principle which
makes the measurement independent of the
size of the population, the monotonicity
principle, and the distributional sensitivity
principle.
Midterm Exam in Economic Development
1. Market equilibrium refers to a situation in
which market price
d. is just above the intersection of the market
supply and demand curves
2. In a duopoly, collusive behavior can raise
overall profits.
a. True
b. False
3. In a duopoly, collusive behavior is the
equilibrium strategy.
a. True
b. False
4. In oligopolistic markets, few suppliers sell a
homogeneous good.
a. True
5. Firms in oligopolistic markets always earn zero
profits in the long run.
b. False
6. Peasant farmers in LDCs are generally observed to:
c. Both a and b
7.Autarky refers to a country
b. which is self-sufficient, and is a closed economy
8. A public works projects pay $5 a day to poor rural
laborers who would otherwise earn only $2 per day
from casual labor. The opportunity cost, or shadow
wage rate, of labor is:
a. $2
9. Historically, low rate of population growth was
maintained because of
b. high mortality rates.
10. The main domestic source of savings in LDCs is
c. savings by households
11. The LDCs want foreign capital in the form of
d. all of the above
12. If the birth rate is 6% and the death rate is 2%, the
natural rate of population increase is
c. 4.0%
13. According to the Ricardian model, the reason for
lower priced services in the LDC&#39 is
b. Labor-productivity in commodities is lower in poor
countries,
14. Which of the following statements is not true about
import restriction
d. Import restriction shift welfare from producers to
consumers
15. According to Malthus, the fixed factor of
production is
c. Land,
16. According to the Harrod-Domar model, an increase
in growth rates depends on
c. Increase in marginal propensity to consume,
17. Which of the following is not true about
agriculture’s role in economic development
d. None of the above
18. According to W.W.Rostow, which of the following
does not belong to the &”precondition for take-off”
d. Growth of the durable consumer goods industry
19. If a country experiences a rapid increase in per-
capita income due to discovery of new oil reserves,
then it is experiencing:
c. both growth and development.
20. According to Kuznets, the identifying characteristic
of "modern economic growth" is
c. high rates of saving and investment.
21. If 's' is the savings rate and 'v' the capital-output
ratio, then 'g' the rate of growth in the Harrod Domar
model is represented by
d. s/v.
22. The idea which suggests that poverty is self-
perpetuating because poor nations are unable to save
and invest enough to accumulate the capital stock
that would help them grow is
d. the under-consumption’s hypothesis.
23. If the vicious-cycle-of-poverty hypothesis were
true at all levels of per capita income, then
b. no nation could ever achieve economic development.
d. poverty would not be self-perpetuating.
24. The absolute poverty line:
d. none of the above.
25. Most lists of basic human needs include all the
following items except
a. basic transportation, such as bicycles.
26. Which of the following would not be considered as
an example of industrialization
a. Increase in literacy
27. Which is a measure of absolute poverty?
d. all of the above.
28.Underemployment is a situation where
c. people are working full-time and hard, yet have a low
marginal product
29. Both the Ricardian growth model and the Lewis
model share the assumption that population growth
will outpace food production in the long run.
b. false
30.Compared to the developed countries, the LDCs
have
b. higher birth rates and higher death rates
31. Economic growth measures the
c. increase in output
32. non-traded goods do not enter measured GDP
because
b. they are not traded in the market
33. The concept of opportunity cost is based upon the
principle of
c. scarcity
34. As incomes rise there tends to be a shift of labor
from the services sector to the industrial sector.
b. false
35.Which of the following is not typically an element in
the structural change that accompanies development?
a. increase in the share of agriculture in GDP (gross
domestic product)
36.A supply side vicious circle of poverty suggests that
poor nations remain poor because
e. a and b above
37.Which of the following characteristics are most
likely found in developing countries?
(d) all of the above
38.Economic development refers to
(b) economic growth plus changes in output
distribution and economic structure
39.The common measure of economic development is
(c) Per Capita GDP
40. developing nations have
(d) None of above.
41. Sustainable development involves
(a) Reducing Consumption, increasing efficiency and
using renewable energies.
42.Sustainability is the use of a resource that does not
cause long term depletion of resources or affect the
diversity of the ecosystem.
(a) True.
43. From the economic system's point of view, the role
of marketing intermediaries is to transform the
assortment of products made by producers in to the
assortment of products wanted by ______
A. consumers
44. ________ is a company's ability to perform in one or
more ways that competitors cannot or will not match.
d. Competitive advantage
45. Buying according to the requirements is called
______________
b. Hand to mouth buying
46. integration of business economics and strategic
planning has given rise to a new area of study called
______________.
b. Corporate Economics
47.Developing countries, such as Mexico and India, often
close their borders to foreign companies unless they
are willing to take on partner companies in developing
countries.
a. True
48. The effect of workers migrating from low-wage
Mexico to high-wage United States is to redistribute
income from capital to labor in the United States and
from labor to capital in Mexico.
b False
49. Developing countries have sometimes feared open
immigration policies of developed countries on the
grounds that highly educated and skilled people may
emigrate to the developed countries, thus limiting the
growth potential of the developing countries.
a. True
50.The United States has discouraged the “brain drain”
problem by permitting the immigration of unskilled
workers while restricting the immigration of skilled
persons.
b. False