Measuring inequality

Lorenz Curve and Gini Coefficient

The Lorenz Curve illustrates the distribution of incomes in a country. The Line of Equality represents a country where there is perfect equality - each member would receive the exact same income. The closer the Lorenz Curve is to the Line of Equality, the higher the income equality of that country. The further away from the Line of Equality, the lower the income equality.

The Gini Coefficient indicates how unequal a society is. It indicates how far the Lorenz Curve is from the Line of Equality. It is good for comparing several countries to one another as it is quantitative, but doesn't give as much information as the Lorenz curve does, as it leaves out the distribution of income. It is calculated using the above formula.

G = A/A+B

It always lies between 0 to 1, where 0 is perfect equality, where everyone gets the same amount, and 1 is perfect inequality, where one person has all the income and everyone else gets nothing.

Laffer curve

The Laffer Curve depicts the relationship between rates of taxation and the revenue the government receives in tax. It is a parabola, because past a certain point, higher taxation rates means that there is a lack of incentive to work more, as you are not receiving much of the money you have worked for. Therefore people work less, or find a way to evade high taxes, and there for the government collects less money in tax, leading to the downwards slope.

Tax is one solution to inequality - it redistributes income within a population.

Comments

Output gaps and the business cycle

Output gaps and the business cycle The fluctuation of real GDP around an underlying trend is a phenomenon known as the business cycle. Output gap - difference between the actual output of an economy and its potential output. There are two types of output gap, trend and potential. Trend growth is the estimated rate of growth of an economy. Trend output gaps: Business cycle diagram A negative trend output gap is when real GDP is below trend GDP. The economy is producing below its trend. e.g If real GDP is £1.8 trillion and trend GDP is £2 trillion then the negative output gap is £0.2 trillion. Here the economy is in a bust period. This is characterised by an expansion in GDP, high employment and high confidence. Price levels often rise, meaning inflation occurs. A positive trend output gap is when real GDP is above trend GDP. Here the economy is in a recession (bust). This is characterised by a contraction in GDP, high unemployment and lo

3.1.3 Demergers

Demergers A demerger is the breaking up of a firm into separate firms. e.g Sports Direct selling off Dunlop in 2016. PepsiCo splitting off foods businesses (KFC, Taco Bell, etc.) into a separate corporation, Yum Brands. Later Yum Brands demerged into Yum China and Yum Brands. Reasons for demergers Diseconomies of scale - the opposite of economies of scale, where average costs begin to rise as output increases. May occur due to it being difficult to retain control on the expanding business - principal-agent problem may arise. Also less co-operation by employees who feel more alienated and as a result less productive - they feel less of a connection to the business. May also be hard to co-ordinate and communicate between locations and employees when a firm is large. Miscommunication can again lead to costs rising. To focus on core businesses to streamline costs and improve profits. The firm may have expanded into different markets and experience disadvantages due to t

3.4.1 Efficiency

Efficiency Allocative efficiency Output at which the marginal utility, or benefit, of a good to a consumer is the same as equal to the marginal cost of producing it. This is seen on demand/supply curves, where D = S, output is produced as demand = marginal utility and supply = the sum of firms' marginal costs in an industry. On an individual scale, it is where: AR = MC Output is where the demand curve cuts the MC curve. NB: technically occurs where MSB = MSC (if you consider externalities) Occurs in perfect competition. Eval - PC markets achieve allocative efficiency where there are no externalities. LR equilibrium is where P = MPC, so if MSC > MPC, then there is an allocative inefficiency which leads to overproduction and consumption. Productive efficiency Output at which a good is produced at the lowest possible average cost for a firm. This occurs at the minimum point of the AC curve. AC = MC at this point, because w

Edexcel AS/A Level Economics revision

Search This Blog