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Economics of Poverty

by: Aaron Notetaker

Economics of Poverty ECON 2456

Aaron Notetaker

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About this Document

Deeper look at inequality
Economics of Poverty
D. Kennedy Jr
Class Notes
Economics, poverty
25 ?




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This 3 page Class Notes was uploaded by Aaron Notetaker on Tuesday October 11, 2016. The Class Notes belongs to ECON 2456 at University of Connecticut taught by D. Kennedy Jr in Fall 2016. Since its upload, it has received 42 views. For similar materials see Economics of Poverty in Economics at University of Connecticut.


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Date Created: 10/11/16
Economics of Poverty Week 6 Inequality – a broader look at poverty. Human Capital Theory – everyone’s income reflects the choices about investments in education and training (reflects back to Week 1 with reasons “why people are poor”) Equity VS Efficiency – Arthur Okun (1974) argued that - Too much equality reduced incentives - The opportunity for “striking it rich” can serve as an incentive to seek better ways of production - With growing inequality since late 70s and recent research, this way of thinking has been called into question 2014 research found (while acknowledging its own limitations) - More unequal societies tend to redistribute more - Lower net inequality is correlated with faster and more durable growth, for a given level of redistribution - Redistribution appears generally benign in terms of its impact on growth; only in extreme cases is there some evidence that it may have direct negative effects on growth Income – a flow concept. An in-flow of resources per unit of time. - Income statement: net income = income - expenditures Wealth – a stock concept. An accumulation of resources at a point in time - Balance sheet: net worth = assets – liabilities (an athlete may have a large salary, but have no accumulated wealth. A farmer may own 1000s of acres of valuable land, but earn little income in a given year) 2 individuals with the same income may have vastly different asset portfolios Haig-Simons Income (most widely accepted definition of income) – consumption plus the change in net worth over a given period of time Permanent Income Hypothesis (PIH) – Milton Friedman argued that consumption is not related to current income, but t a longer-term estimate of income that he coined as “permanent income” he argued that people prefer a smooth consumption flow rather than plenty today and scarcity tomorrow Permanent income – steady rate of expenditure a person could maintain for the rest of his life given the present level of wealth and income earned now and in the future C = cYP C = CONSUMPTIONc = marginal propensity to consume YP = permanent DPI Life-Cycle Hypothesis (LCH) – links consumption and savings to demographics especially the age distribution of the population. Individuals plan their consumption and savings over long periods with the intention of allocating their consumption in the best possible way over their entire lifetimes. C = WL/NL +YL The 2 hypotheses still fall shorts - Liquidity constraints – a consumer cannot borrow to sustain current consumption in the expectation of higher future income - Myopia To assess true economic status, we may want to consider income over a period of years (i.e. a farmer with one year of bad harvest, but still expects the following year to be good. OR a grad student living near poverty while in school, while expecting vastly higher incomes after graduation) These life cycle patterns create substantial inequality across age groups. Workers in their peak earning years will cluster at the top of the income distribution, younger and older workers will tend to be at the lower end of the income distribution. Household – 1 or more persons living under the same roof and sharing kitchen facilities Family – people related by blood or marriage When people want to know how the degree of inequality has changed over time, the size and composition of households and families has also changed over time. (i.e. trend distortions) A criterion used to judge degree of inequality is the perception of fairness, or faith in the system. Class Stratification – a situation in which people are trapped in a particular income rank. In order for inequality patterns to be judged or justified, we must look at income mobility, or the ‘equal opportunity,’ causes for the income distribution to shift - Immigration - Marriage/divorce - Age - Retirement - Labor-market changes - Financial-market volatility Mobility matrix – in principle, income mobility is easy to measure. To do so, we must rank everyone according to relative income in a given year. Then, we do the same thing in another year, and observe how many people change relative position. The change in observation is given by the mobility matrix. Panel Survey – 2 or more rounds of survey data collected on the same household. Used in studying income mobility.


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