ECO 315/Dr. Mitchell/Spring 20021

lecture4-poverty & income distribution

Todaro, Ch. 5: Growth, Poverty, and Income Distribution

Does economic growth solve the poverty problem? Not necessarily.

Income Distribution, Lorenz Curves and Gini Coefficients

A Lorenz Curve and a Gini Coefficent are ways of measuring the degree of income inequality in a society.

The Lorenze Curve

A Lorenze Curve shows a country’s income distribution on a graph. Here are the steps involved:

  1. Get data on each family’s income. (Commonly done with a survey.)
  2. Rank the families from lowest income to highest income.
  3. Count the number of families, and divide the total by 5. Group the families into five equally-sized groups from poorest to richest. Each of these groups is called a quintile.
  4. Add up the total income earned by each quintile.
  5. Express the income earned by each quintile as a percentage of the total income earned by all families.
  6. Moving from the poorest quintile to the richest, sum income earned by that quintile and all of the earlier quintiles.
  7. Plot this information on a graph.

Example: US income

1994. Data from the World Development Report 1999-2000, p. 239.

Here we have already been given the needed information. (We also have some extra information for the lowest and highest deciles of the population at the bottom of the table—this information helps round out the picture.)

Quintile / % of Pop. / % of Inc. / Cummulative
% of Inc.
0 / 0 / 0
10 / 1.5 / 1.5
1 / 20 / 4.8 / 4.8
2 / 40 / 10.5 / 15.3
3 / 60 / 16 / 31.3
4 / 80 / 23.5 / 54.8
90 / 28.2 / 71.8
5 / 100 / 45.2 / 100


We plot the data in the final column on the percentage of the population. Connecting the dots gives the curve you see in the graph.

Question: If income were divided equally among households, then what shape would the Lorenz curve have?

Gini Coefficient

The Gini Coefficient aims to measure the “distance” between this country’s income distribution and a totally equal distribution of income. The hatched area above shows this distance for the US.

Question: What is the total area under the straight line equal to?

Let x equal the area of the hatched region above.

Formula for the Gini coefficient = [x/50]100

Questions: If there is perfect income equality, then what value will the Gini coefficient have?

Suppose one family has all the income. Then what value will the Gini coefficient have?

The Gini coefficient in the World Bank data falls between 0.20 and 0.55. (Note: The WB is using a 0-100 scale instead of 0-1.)

See Tables 5.2 & 5.3 on transparencies.

Absolute Poverty

Absolute poverty: the degree to which people are unable to secure the necessities of living.

International Poverty Line: $1 per day in PPP dollars.

PPP ( Purchasing Power Parity): the idea that there is a different cost of living in different countries beyond simply converting currencies at the market exchange rate. PPP exchange rates take the market exchange rate and the cost of living into account.

PPP dollars: A figure that has been converted using the PPP exchange rate, so that figures around the world can be compared directly to the purchasing power that a US dollar has in the US.

See Table 5.5 on transparency.

Generalizations about Poverty

The poor are more likely to:

  • Live in rural areas
  • Participate in agricultural activities
  • Be women or children living in female-headed households
  • Be part of a minority ethnic group or an indigenous people

More on Gender and Poverty

Several cultural and institutional factors contribute to women’s poverty. They can include:

  • Families choose to invest less on nutrition, education, and healthcare for women and girls.
  • Women are less likely to work in the market, which limits their ability to control family resources. This also reduces their perceived value to the household, tending to reinforce the decision to invest less on them.
  • Women may have limited legal rights and protections that prevent them from owning businesses. (property ownership, contracts, loans)

The Relationship between Income Distribution and Growth

Why an More Unequal Distribution may Help Growth

The rich are better able to save and invest, adding necessary capital to the production process and stimulating growth.

In fact, the rich in developing countries often invest their money elsewhere, and this idea does not have much support any more.

Why a More Equal Distribution may Help Growth

  • Since the poor can’t save or invest in their children’s education, they might have more children with the idea they will support them in their old age. This perpetuates poverty.
  • The poor may have such low levels of nutrition, health, and education that they are less productive in the workplace than they ought to be. Improving the situation may lead to growth.
  • If the poor were to have higher incomes then they would spend it on locally-made goods, stimulating demand, rather than on expensive imported goods.
  • Improving the situation of the poor may have powerful psychological implications for growth.

Determinants of the Distribution of Income

The distribution of income arises directly out of the distribution of productive factors of production: land, physical capital, human capital, labor.

Policy Options

Correct Factor Price Distortions

In developing countries we often see that wage rates are artificially high, due to unions and/or minimum wage laws. Likewise, the price of physical capital is often artificially low due to various policies such as: investment incentives, tax allowances, subsidized interest rates, overvalued exchange rates, and low tariffs on capital goods import. Correcting these distortions may help the distribution of income (do you see how?)

Redistribution of Assets

Land reform (must include access to other inputs such as credit)

Other redistribution of assets as growth occurs

Education as redistribution

Progressive Taxes

Note that in spite of a progressive system in law, in practice the system may be regressive if there is more tax evasion by the rich. Need to reform tax collection systems.

Direct Transfers of Money and Goods

Cash transfers (note incentives)

Public health initiatives

Clean water, electricity supply

School feeding programs