Facts About
Income
Inequality
Causes of
Income
Inequality
Equality
Versus
Efficiency
The
Economics
of Poverty
S.A.
Government
Actions
Last Word
Key Terms
End Show
11-1
11
Income
Inequality
and Poverty
Copyright 2011 The McGraw-Hill Companies
Chapter Objectives
Facts About
Income
Inequality
Causes of
Income
Inequality
Equality
Versus
Efficiency
The
Economics
of Poverty
S.A.
Government
Actions
Last Word
• Income Inequality in South Africa
• The Extent and Sources of Income
Inequality
• The Economic Arguments For and
Against Income Inequality
• How Poverty is Measured and its
Incidence by Age, Gender, Ethnicity,
and Other Characteristics
• What is the Government doing to
reduce poverty
Key Terms
End Show
11-2
Copyright 2011 The McGraw-Hill Companies
Facts About Income Inequality
Facts About
Income
Inequality
Causes of
Income
Inequality
Equality
Versus
Efficiency
The
Economics
of Poverty
S.A.
Government
Actions
Last Word
Key Terms
End Show
• Average Household Income
R74,588 in 2005/6
Distribution of S.A. Income by Households, 2005/6
(1)
Personal
Income – Mean R/Annum
D1 - R4 314
D2 - R9 592
D3 - R13 300
D4 - R17 630
D5 - R22 981
D6 - R30 534
D7 - R43 589
D8 - R69 540
D9 - R128 846
D10 -R405 646
Avg – R74 588
(2)
Percentage of Income
0.14
1.20
2.17
2.87
3.50
4.70
6.36
10.26
17.80
51.00
100.0
Source: Statistics South Africa
11-3
Copyright 2011 The McGraw-Hill Companies
Facts About Income Inequality
• Lorenz Curve and Gini Ratio
The Lorenz Curve
e
100
(Actual Distribution)
80
Perfect Equality
60
d
A
c
20
Complete
Inequality
b
0
a
20
40
60
80
Percentage of Households
Gini Ratio =
11-4
B
40
Key Terms
End Show
11.1
Lorenz Curve
Percentage of Income
Facts About
Income
Inequality
Causes of
Income
Inequality
Equality
Versus
Efficiency
The
Economics
of Poverty
S.A.
Government
Actions
Last Word
Copyright 2011 The McGraw-Hill Companies
f
100
Area A
Area A + Area B
11.1
Facts About Income Inequality
100
80
Percentage of Income
Facts About
Income
Inequality
Causes of
Income
Inequality
Equality
Versus
Efficiency
The
Economics
of Poverty
S.A.
Government
Actions
Last Word
• Effect of Government
Redistribution
60
Lorenz Curve
After Taxes and
Transfers
40
20
0
Lorenz Curve
Before Taxes and
Transfers
20
40
60
80
100
Percentage of Households
Key Terms
Impact of Government Taxes and Transfers
End Show
11-5
Copyright 2011 The McGraw-Hill Companies
Causes of Income Inequality
Facts About
Income
Inequality
Causes of
Income
Inequality
Equality
Versus
Efficiency
The
Economics
of Poverty
S.A.
Government
Actions
Last Word
Key Terms
•
•
•
•
•
•
•
Ability
Education and Training
Discrimination
Preferences and Risks
Unequal Distribution of Wealth
Market Power
Luck, Connections, and
Misfortune
End Show
11-6
Copyright 2011 The McGraw-Hill Companies
Causes of Income Inequality
Facts About
Income
Inequality
Causes of
Income
Inequality
Equality
Versus
Efficiency
The
Economics
of Poverty
S.A.
Government
Actions
Last Word
• Causes of Growing Inequality
– Greater Demand for Highly
Skilled Workers
– Demographic Changes
– International Trade, and
Immigration
Key Terms
End Show
11-7
Copyright 2011 The McGraw-Hill Companies
Causes of Income Inequality
Facts About
Income
Inequality
Causes of
Income
Inequality
Equality
Versus
Efficiency
The
Economics
of Poverty
S.A.
Government
Actions
Last Word
Key Terms
Percentage of Total Income Received
by the Top One-Tenth of Income
Receivers, Selected Nations
GLOBAL PERSPECTIVE
0
Guatemala
Brazil
South Africa
Mexico
United States
Italy
Sweden
Germany
10
20
30
40
50
48.3
46.9
44.7
43.1
29.9
26.8
22.2
22.1
End Show
Source: World Bank, World Development Indicators, 2005
11-8
Copyright 2011 The McGraw-Hill Companies
Equality Versus Efficiency
Facts About
Income
Inequality
Causes of
Income
Inequality
Equality
Versus
Efficiency
The
Economics
of Poverty
S.A.
Government
Actions
Last Word
Key Terms
• The Case for Equality:
Maximizing Total Utility
• The Case for Inequality:
Incentives and
Efficiency
• The Equality-Efficiency
Tradeoff
End Show
11-9
Copyright 2011 The McGraw-Hill Companies
Equality Versus Efficiency
The Utility-Maximizing Distribution of Income
(Entire Blue Area)
Utility Loss
(Entire Red Area)
b’
a’
b
MUA
R2500 R5000
Income
End Show
11-10
Marginal Utility
Utility Gain
a
0
Key Terms
Brooks’ Marginal
Utility From Income
Anderson’s Marginal
Utility From Income
Marginal Utility
Facts About
Income
Inequality
Causes of
Income
Inequality
Equality
Versus
Efficiency
The
Economics
of Poverty
S.A.
Government
Actions
Last Word
Copyright 2011 The McGraw-Hill Companies
MUB
0
R5000 R7500
Income
The Economics of Poverty
• Definition
Facts About
Income
Inequality
Causes of
Income
Inequality
Equality
Versus
Efficiency
The
Economics
of Poverty
S.A.
Government
Actions
Last Word
Key Terms
• Incidence of Poverty
Poverty Indicators by Province (2004)
(1)
Province
Eastern Cape
Free State
Gauteng
Kwazulu Natal
Limpopo
Mpumalanga
North West
Northern Cape
Western Cape
South Africa
(2)
No. of Poor
Persons (Million)
4.6
1.8
3.7
5.7
4.1
1.8
1.9
0.5
1.4
25.7
(3)
% of Population
In poverty
72
68
42
61
77
57
52
61
32
57
End Show
Source: Statistics South Africa
11-11
Copyright 2011 The McGraw-Hill Companies
What is Government Doing to
Change all this
Facts About
Income
Inequality
Causes of
Income
Inequality
Equality
Versus
Efficiency
The
Economics
of Poverty
S.A.
Government
Actions
Last Word
• Social Programmes
– Old age pension
– Disability Pension
– Grants
• Unemployment compensation
– UIF
• Public Works Programmes
– Work for Water
Key Terms
End Show
11-12
Copyright 2011 The McGraw-Hill Companies
Is South Africa becoming a
better place to stay?
Facts About
Income
Inequality
Causes of
Income
Inequality
Equality
Versus
Efficiency
The
Economics
of Poverty
S.A.
Government
Actions
Last Word
Key Terms
•
•
•
•
•
•
Poverty declined ?
Increase in Social Grants
Public Works contributed
Rich is getting richer
International poverty
Richest 500 people in the world
earned more than the poorest 416
million
End Show
11-13
Copyright 2011 The McGraw-Hill Companies
Key Terms
Facts About
Income
Inequality
Causes of
Income
Inequality
Equality
Versus
Efficiency
The
Economics
of Poverty
S.A.
Government
Actions
Last Word
•
•
•
•
•
•
•
•
•
Income Deciles
Lorenz curve
Gini ratio
income mobility
poverty rate
Equality
Efficiency
income inequality
poverty
Key Terms
End Show
11-14
Copyright 2011 The McGraw-Hill Companies
• unemployment
compensation
• Government
Redistribution
• Social welfare
programmes
• public work
programmes
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Facts About
Income
Inequality
Causes of
Income
Inequality
Equality
Versus
Efficiency
The
Economics
of Poverty
S.A.
Government
Actions
Last Word
Money, Banking
Interest Rates
and
Monetary Policy
Key Terms
End Show
11-15
Copyright 2011 The McGraw-Hill Companies