Poverty, Income Distribution, and Government Policy

1
Poverty, Income Distribution, and Government
Policy
Chapter 20
2
Income Distribution (1)

• The most widely used measure of income inequality
  is the Lorenz curve, which provides a graphical
  representation of the distribution of income
  among members of a population.
• A 45 line represents equal incomes among all
  members of the population. It is called the line
  of income equality.
• At each point on the line, the percentage of
  total population and percentage of real GDP are
  equal.
• For example, 10 of the population earns 10 of
  the income, etc.

3
Income Distribution (2)

• The bowed curve is the Lorenz curve.
• The farther the Lorenz curve bows away from the
  line of income equality, the greater the
  inequality of the distribution of income.

4
U.S. Lorenz Curve
5
Lorenz Curves for Mexico and the U.S.
6
Poverty (1)

• Income or per capita income is sometimes used to
  measure poverty (2002 level 18,244).
• Economists can measure income before any
  government cash transfers, or after government
  cash transfers and assistance like food or
  shelter.
• Cash transfers are payments of income allocated
  away from one group in society and given to
  another.
• In-kind transfers are allocations of goods and
  services from one group in society to another.

7
Poverty (2)

• The U.S. establishes formal income poverty cutoff
  levels.
• It does this by determining that the proportion
  of income spent by an average family on food is
  about 1/3, and then determining the cost to
  purchase meals for the family according to a
  nutritional standard. The cost of meals is then
  multiplied by 3.

8
Age and Poverty
9
Causes of Poverty

• The primary characteristic of those who fall
  below the poverty line is a lack of a job.
• Place of residence also affects a persons
  ability to earn income.
• Education is another factor in determining
  income.
• Poverty does not affect all racial and age groups
  equally.

10
Tax Policy

• Progressive tax a tax whose rate increases as
  income increases.
• Tends to reduce income inequality.
• Proportional tax a tax whose rate does not
  change as income increases.
• Neutral to the income distribution.
• Regressive tax a tax whose rate decreases as
  income increases.
• Tends to increase income inequality.

11
Spending and Poverty