ECON 390 ISSUES AND PROBLEMS IN DEVELOPING ECONOMIES

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ECON 390 ISSUES AND PROBLEMS IN DEVELOPING
ECONOMIES

• Lecture 8 Measuring inequality its impact on
  development

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Goals for today

• Class update?
• Practice questions for midterm posted
• Inequality
• How do we measure it?
• How are inequality and development connected?

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Measuring inequality 1st approach size
distribution of income

• Arrange all individuals by ascending personal
  incomes
• Divide population into groups. Examples may
  include
• Quintiles
• Deciles

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Table 5.1
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Look at size distributions in actual developing
and developed countries
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Figure 5.1
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Problems with just using Lorenz curves to analyze
inequality

• Policy makers and researchers are often
  interested in summarizing inequality by a number
• If Lorenz curves cross, we cannot rank the
  inequality of the two countries.

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Desirable properties of inequality measures

• Anonymity principle
• Scale independence principle
• Population independence principle
• Pigou-Dalton or transfer principle

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Figure 5.3
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Looking at Gini coefficients
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Functional distribution of income

• Goal explain/measure share of total national
  income that each of the factors of production
  receives
• Factors of production
• Wages
• Rents
• Interest
• Profit

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Why is the functional distribution of income
important?

• Understanding of income sources may well
  influence how we judge the outcome
• Functional distribution tells us a lot about the
  relationship between inequality and other aspects
  of development

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Why is the relationship between inequality and
other features of development?

• Kuznets (1955)
• Measure of inequality ratio of income share of
  the richest 20 of population to the poorest 60.
• Developing countries India (1.96), Sri Lanka
  (1.67), Puerto Rico (2.33)
• Developed countries United States (1.29) and
  United Kingdom (1.25)

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Inverted-U hypothesis

• Economic progress is initially accompanied by
  rising inequality.
• These disparities ultimately go away as
  development continues.

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