Ecomomics evelopment 10th y p todaro and smith chapter 05

Chapter 5
Poverty,
Inequality, and
Development

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Measuring Income Distribution
Relative Income Share:
• The ratio of the highest 20% to lowest 40% of
the population
• The higher the ratio, the greater is income
inequality

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Typical Size Distribution of Personal Income

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Lorenz Curve of Income Distribution
• Depicting:
quintile percentage of population vs.
cumulative percentage of income received

• The closer the Lorenz curve to the line of equality, the
better is the size distribution of income

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Lorenz Curve of Income Distribution
Data for the United States in 2000:
Quintile

% Income

% Cumulative Income

Lowest 20%

3.6

3.6

Second 20%

8.9

12.5

Third 20%

14.9

27.4

Fourth 20%

23.0

50.4

Richest 20%

49.6

100.0

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Lorenz Curve of Income Distribution

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Lorenz Curve of Income Distribution

The greater the curvature of the Lorenz Curve, the greater is the
Copyright
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Improved Income Distribution

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Worsened Income Distribution

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Crossing Lorenz Curves

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The Gini Coefficient

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The Gini Coefficient
0 < The Gini Coefficient < 1
• 0.41 for U.S.
• 0.30 for Ethiopia
• 0.57 for Brazil
• Gini Coefficient is higher for the OPEC and
Middle-income countries than Low-income
countries
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The Gini Coefficient
Income inequality had had a tendency to
increase.
1960
LDCs

0.544 0.602

Low income countries

0.407 0.450

1980

Middle-income countries 0.603 0.569
The OPEC

0.575 0.612

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Income Distribution Measures

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Income Inequality

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Functional Income Distribution

• Assume a traditional economy in which labor is the
only variable input (capital and land are fixed): Output
= Wages + Profits
• Functional income distribution = Wages as a
percentage of Profits
• The higher the ratio, the greater is income equality

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Functional Income Distribution

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Poverty Gap
Average percent of income shortfall below
the poverty line. Over 10.5% in LDCs
• Latin America & Caribbean: about 9%
• Middle East and North Africa: about 1%
• Sub-Saharan Africa: about 15%
• South Asia: 13%
• China, East Asia & Pacific: 8%
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Measuring Poverty Gap
• Poverty and income inequality depend on
type of economic, political and institutional
arrangements according to which rising
national incomes are distributed among
broad segments of a population
• A middle-income country may have a higher
poverty rate and poverty gap than a lowincome country (South Africa vs. Sri Lanka)
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Measuring Total Poverty Gap

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Growth and Distribution
The “Inverted-U” Kuznets Curve
• Income inequality increases during the early stages of
growth
• Income equality increases during a later stage of
growth with redistribution of income and wealth

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The Kuznets Curve

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Evidence on Kuznets Curve
• Cross country evidence supports the hypothesis
• Time series data show some countries have
been able to grow and improve income
distribution at the same time

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Kuznets Curve in Latin American

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Income Inequality Across Time

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