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Economics of Poverty Final Exam Study GuidePART 4: The Economics of Poverty and Inequality1. Theory of Functional Distribution – sees the demand for land, labor, and capital as derived demand, stemming from the demand for final goods. a. (from Google) functional income distribution refers to the division between groups of people while personal income distribution refers to the division among individuals.2. Factors of productiona. Land – includes any natural resource used to produce goods and services – Rent (r)b. Labor – effort that people contribute to the production of goods and services – Wages (w)c. Capital – the machinery, tools, and buildings humans use to produce goods and services (a produced resource, as opposed to natural resource) – Interest (i)d. Entrepreneurship – person who combines the other factors of production to earn a profit – Profit (π) 3. Neoclassical Theory of the distribution of income to the factor shares - the method of identifying the product of labor, which determines wages, and the product of capital, which determines interest, is analogous to the theory of valuing commodities in terms of their Marginal Utilitya. (from Google) Neoclassical distribution theory. In neoclassical economics, the supply and demand of each factor of production interact in factor markets to determine equilibrium output, income, and the income distribution. Factor demand in turn incorporates the marginal-productivity relationship of that factor in the output market-3 major alternate theories b. Classical Theories – functional income distribution is variable c. Marx’s Theory – value of each commodity is determined by the labor contained in it, measured in time.d. Keynesian-Based Theories – based on Keynesian postulates 4. Wages and Compensation for the typical worker have lagged far behind the nation’s productivity growth in recent decades, and this reflects a break in a key transmission mechanism by which productivity growth raises living standards for the vast majority of workers.a. The “Loss in Labor’s Share of Income” Wedge-An overall shift in how much of the income in the economy is received by workers in wages
and benefits, and how much is received by owners of capital. The share going to workers decreased, especially after 2000.b. The Growing Inequality of Compensation Wedge-The hourly compensation of the median worker grew just 8.7%, far less than average worker compensation. Most of the growth in median hourly compensation occurred in the short period of strong recovery in the mid- to late 1990s (excluding 1995–2000, median hourly compensation grew just 2.6% between 1973 and 2014).c. The “Terms-of-Trade” Wedge, which concerns the faster price growth of things workers buy relative to the price of what they produce.i. This wedge is due to the fact that the output measure used to compute productivity and net productivity is converted to real (inflation-adjusted), dollars based on the components of GDPii. While the compensation measures are converted to real dollars based on measures of price change in what consumers purchase. Prices for national output have grown more slowly than prices for consumer purchases (CPI).5. (from Google) The Great Compression refers to "a decade of extraordinary wage compression" in the United States in the early 1940s. During that time economic inequality as shown by wealth distribution and income distribution between the rich and poor became much smaller than it had been in preceding time periods.-Factors explaining Great Compressiona. National Industrial Recovery Act – imposed minimum wages on industriesb. Fair Labor Standards Act – minimum wage – would explain compressionin the bottom half of the wage distribution, but would not explain compression of upper half. c. High UR during Great Depression – Reserve Army would have depressed and compressed wages, especially for the low and unskilled d. National War Labor Board – any wage increase was illegal without NWLB approvale. High tax rates during WWII, especially for upper-income – considered very upper-income pay increases as greed and socially wasteful activities rather than productive work effort. f. Wartime demand for less-skilled workers – short-run impact g. Demand for, and supply of, educated workers – longer-run changes as supply rose relative to demand-(From Google) Great Divergence - referring to the process by which the Western world overcame pre-modern growth constraints and emerged during the 19th century as the most powerful and wealthy world civilization of all time6. For Kuznets, there are at least two groups of forces in the long-term operationof developed countries that make for increasing inequality in the distribution of income before taxes and excluding contributions by government
a. The First Group relates to the concentration of savings in the upper income brackets.b. The Second Source of the Puzzle lies in the industrial structure of the income distribution.-Conclusions of Kuznets Curveo All other conditions being equal, the increasing weight of urban population means an increasing share for the more unequal of the two component distributionso The relative difference in per capita income between the rural and urban populations does not necessarily drift downward in the process of economic growth: indeed, there is some evidence to suggest that it is stable at best, and tends to widen because per capita productivity in urban pursuits increases more rapidly than in agriculture. o If this is so, inequality in the total income distribution should increase. Graph 4-6, lecture 3, slide 61o Empirical data does not seem to support the Kuznets Hypothesis 7. Stock – at a point in time, Flow – over timea. Income is a flow – corresponds to the quantity of goods and services produced and distributed each year. b. Wealth is a stock – corresponds to total wealth owned at a given point in time. Comes from the wealth appropriated or accumulated in the past. Nonhuman net worth – the sum of nonfinancial and financial assets, net of financial liabilities. -Primary income – income before taxes and gov’t transfers-Disposable income – income after taxes and transfers8. Family wealth – indicator of well-beinga. Owner-occupied housing provides services directly to its owner b. Assets can be converted directly into cash and provide from immediateconsumption needsc. Availability of financial assets can provide liquidity to a family in times of economic stress d. Wealth affects household behavior over income e. Wealth-generated income does not require the same trade-offs with leisure as earned incomef. Distribution of power is often related to distribution of wealth9. Inequality in the long runa. A century ago, income inequality was larger in Europe than in the US. Currently inequality is larger in the US.b. Observed the same great inequality reversal when looking at wealth i. Wealth concentration is always much higher than income concentrationc. Looking at the evolution of the aggregate value of wealth relative to income, we find large variations, with striking differences between
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School: University of Connecticut
Course: Economics of Poverty
Professor: D. Kennedy
Term: Fall 2016
Tags: Economics, poverty, and Studyguide
Name: Economics of Poverty Final Exam Study Guide
Description: Tried to be pretty thorough with this. Where there were gaps in my notes, or in the lecture slides I provided other information with a little note. Obviously not everything will be perfect, so double check if you think something doesn't look right.