i’m so sorry (Chapter 16 Q & A)

06/05/2013 § Leave a comment

#1. 25 marks.

a) Using a Lorenz curve diagram and examples, distinguish between a country with a high level of income equality and one with a low level of income equality.

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A Lorenz curve is a diagram used to graphically represent a country’s income distribution among its population. With it comes the Gini coefficient, which is an economic indicator of the level of income distribution in a nation. This number is normally between 0 and 100; the closer it is to 100, the greater the disparity amongst the nation’s population, and the closer the number is to 0, the more equally the income of the nation is distributed throughout the households. In a simpler sense, we can distinguish between countries with higher levels of income equality and countries with lower levels of income equality by how close they are to the line of equality in a Lorenz curve. Country A (the purple line), for example, would then be the country with a higher level of income equality simply because it’s closer to the line of equality (which is 45° from the axes). Therefore, Country B (the orange line) would be the country with the lower level of income equality because it’s farther from the line of equality. This suggests that Country B has a higher disparity amongst its people, meaning that the difference between the rich and the poor is vaster than that of Country A. In order to improve its income equality, the government could implement certain taxes, ranging from proportional, regressive and progressive taxes.

b) Justify the claim that poverty’s consequences makes its elimination the most important objective of economic policy.

There are two kinds of poverty in an economic sense. There is relative poverty, which is the poverty that people experience even in the world’s richest countries, but absolute poverty refers to the people in the lowest percentile in terms of income, wherein they cannot even afford the most basic necessities for survival and safety. Of course the presence of any kind of poverty in a nation presents multiple different problems for the country, including political and social unrest. Obviously if there is poverty, there is a gap between the poor and the rich that sets off a big disparity that differentiates one group from the other based on their income. This reduces the equality the citizens feel, as well as the difficulty politicians have to face when making decisions, either to keep their positions or to improve their people’s situation.

Governments can use different taxes to improve or worsen their citizens’ quality of life. Certain taxes can put different burdens on the rich and the poor. A proportional tax puts more of a burden on the rich because both sides pay the same percentage of their income, but since the poor have an overall smaller amount of income, they typically pay less than the rich, who would naturally have to pay more. A regressive tax puts more of a burden on the lower income households because it is a tax that decreases as an individual’s income increases. This tax is more of an incentive for people to work harder to increase their incomes at work. Finally, a progressive tax is what normally works the best if the macroeconomic goal of the nation is the establish equity in the distribution of income. Technically, as the income increases, the tax an individual needs to pay also increases. The principle of this tax is that those who can pay more should pay more and most Northern European countries who use this tax have the most equal distributions of income.

However, even if the government has options to eliminate poverty through taxes, there are of course consequences in altering taxes. If the taxes increase, people would be disincentivized (?) to work hard, especially the rich people. Following this, productivity and efficiency in households and firms would decrease because of the lack of motivation. Additionally, if the government chooses to eliminate poverty, it would mean subsidizing the poor, and where would they get the money to do that? Taxes, the burden of which is undertaken by the rich, because they can afford the tax. This would cause unrest among the rich but if the government didn’t support the poor through subsidies, there would be an even larger percentage of inefficient and uneducated citizens in their nation which would add to the production costs of firms, reducing AS, lowering the price, therefore causing deflation. In this sense, if the government solely focuses on eliminating poverty, they’d only cause more problems for themselves.

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