Econ 2456 Midterm 1

7. What is the Official US Poverty Measure?

$3,000 after taxes (1962) for families of all sizes and $1,500 for individuals

What are the two major sources of data on poverty and inequality? What are the three major household surveys conducted in the US that provide data on poverty and inequality?

1) administrative data and survey data 2) SIPP, CRS, ACS

What happens to the shape of the Frequency Polygon as the number of classes increases?

As the number of classes is increased, the polygon eventually becomes a smooth curve

Mention any two of the seven features of "The Personal Responsibility and Work Opportunity Reconciliation Act of 1996"

Child support and work requirements

3. Who developed a theory of distribution within capitalism?

David Ricardo

(T/F) A "household" refers to people related by blood or marriage

False

(T/F) Adam Smith supported the Mercantilist view that a country's economic welfare was to be judged by its BOT

False

(T/F) In principle, a list of absolute necessities should change regularly over time

False

(T/F) The closer the Lorenz curve is to the diagonal, the more unequal the distribution of income

False

(T/F) The official government measure of poverty uses the relative approach to defining poverty

False

In their research at the IMF, Ostry, Berg, and Tsangarides were the first to take advantage of a recently-compiled cross country dataset that distinguishes market (before taxes and transfers) inequality from net (after taxes and transfers) inequality and allowed them to calculate redistributive transfers for a large number of country-year observations. What were their three main findings?

Findings: more unequal societies tend to redistribute more; lower net inequality is robustly correlated with faster and more durable growth, for a given level of redistribution; redistribution appears generally benign in terms of its impact on growth

4. From a Global Perspective what are the top five causes of poverty identified by Williams (2016)?

History, war and political instability, national debt, discrimination and social inequality, vulnerability to natural disasters

12. What are three levels of discrimination described by Pincus (2000)?

Individual, institutional, structural

13. What are the four kinds of discrimination identified by the National Research Council (2004)?

Intentional, subtle, statistical, organizational

Who is called the father of utilitarianism?

Jeremy Bentham

Who developed the first US poverty thresholds 1963-64?

Mollie Orshansky

How did Mercantilists view the labor-supply curve for low wage workers?

Negatively sloped labor supply function

9. As long as there is a "level playing field", should we care about Inequality of Outcome?

No

3. Why have, in particular, American economics been slow to tackle the problem of inequality?

One reason that American economics has been slow to tackle the problem of inequality is because it has never been a priority for the Chicago school that has long been a leader in the field.

Who established the first poverty line as part of an anti-poverty policy?

Parish of Speen in the Speenhamland System of 1795

What are the two basic roles of anti-poverty policies?

Protection and promotion

Interquartile range is the difference between which two quartiles?

Q3 and Q1

Name any two of the four major pieces of legislation that made up the core of the War on Poverty.

Social security Act of 1965 Food stamp act of 1964

11. What is the Equity vs. Efficiency Trade-Off Argument?

The equity vs. efficiency trade off argument states that too much equity reduces incentives.

5. As the US Income Distribution has become more unequal since the 1970's, what has happened to the growth-rate in US Real Per Capita GDP?

The growth rate in US Real Per Capita GDP has increased since the 1970's.

4. What is the Rule of 70? What does it tell us about an economy that is growing at 2%/year?

The rule of 70 is a means of estimating the number of years it takes for a certain variable to double. This means that it'll take 35 years (70/2) for the real GDP to double

Which one of the following is an entropy measure of inequality?

Theil's index

2. In his October 14, 2016 editorial in the New York Times, what did Nobel Laureate Robert J. Shiller suggest was the driving force behind increasing political polarization and rise in ethno-nationalism?

There has been an increasing concentration of income and wealth in the developing nations over the last 30 years.

"Population grows at a rate greater than the means to feed it, and, if unchecked, the world's population will double every 25 years." This thesis was proposed by whom?

Thomas Malthus

What is the difference between transitory and permanent income?

Transitory income is the fluctuation in income over time Permanent income is a person's accumulated savings/wealth

(T/F) A Gini Coefficient of 0 represents perfect equality in the distribution of income

True

(T/F) A quintile is 20% (one-fifth) of a population group

True

(T/F) As per the global poverty line update of September 2015, the world bank updated the global poverty line to $1.90

True

(T/F) As the number of classes increases, the Frequency Polygon becomes a smooth curve

True

(T/F) Both the Official Poverty Measure (OPM) and the Supplemental Poverty Measure (SPM) use income as the measure or resources

True

(T/F) Defining global poverty in the context of American standards would classify most people in the developing world as poor

True

(T/F) Fuchs defined those with incomes less than 1/2 of the national Median Income as poor

True

(T/F) Human capital theory suggests that everyone's income reflects individual choices about investments in education and training

True

(T/F) Income is a flow concept

True

(T/F) One problem the the absolute approach to poverty is that there is no agreement as to how many additional goods and services to include in the definitional bundle of minimum goods and services

True

(T/F) Prominent classical economists, including Malthus and Ricardo, argued for either abandoning the poor laws or reforming them

True

(T/F) The PRWORA of 1996 ended a 60-year Federal entitlement and turned the primary responsibility for welfare over to the states

True

(T/F) The United Nations set a "Millennium goal" to cut the incidence of global poverty in half between 2000 and 2015

True

(T/F) The flawed character cause of poverty refers to individuals defects on aspiration or ability

True

(T/F) The poverty line is updated each year for rising prices but not for increasing standards or living

True

6. Based on the three metrics, who is more likely to be poor in America?

Unrelated families, and especially children under 18 in unrelated families, blacks, Hispanics, females, under 18 years of age, foreign born, south west, disability, no high school diploma, high school diploma, no college

1. When the Pew Research Center's Global Attitudes Project did a survey in 2014, what did respondents in the United States and Europe identify as the "greatest danger to the world"?

When the Pew Research Center's Global Attitudes Project asked people about the "greatest danger to the world" it found that the US and Europe "concerns about inequality trump all other dangers."

5. What are the two general approaches to identify who is poor? Briefly describe each one.

a. Absolute method - begins with the concept of minimum subsistence b. Relative method - states that a person is poor when his or her income is significantly less than the average income of the population

2. What is the difference between Absolute Poverty and Relative Poverty?

a. Absolute poverty - measures poverty in relation to the amount of money necessary to meet basic needs such as food, clothing, and shelter b. Relative poverty - poverty in relation to the economic status of other members of society

15. How does the value of ε affect the Atkinson Index of inequality? Like some of the other single-number indices of inequality, there is a jump in its value in 1993. What happened in 1993?

a. As ε increases, increases in lower incomes are given relatively more weight in producing social welfare b. There were two factors driving the jump in 1993: changes in the current population survey and changes in the economy

1. What are the Classical, Neoclassical, Keynesian, and Marxian Economic Schools of Thought on poverty and perspectives on individual decisions? Briefly explain their opinions.

a. Classical - poverty is liked to individual deficiencies (lack or industriousness or virtuous morality, low levels of education, low levels of competitive market skills) b. Neoclassical - individuals' decisions may be affected by markey failures c. Keynesian - poverty/joblessness may be due to a lack of aggregate demand d. Marxian - poverty is the result of class-based oppression

2. What are the four main points of difference in terms of Utility, Value, Rationality, and Equilibrium between the Classical and Neoclassical schools of thought? Briefly describe each one.

a. Classical - utility is absent in theories of value, labor, and growth; value = cost; rationality is not emphasized; equilibrium occurs when SAV=INV b. Neoclassical - the perceived value if goods and services by the consumer; the value of a good is a function of the demand for it and the supply of it; individual agents have rational preferences that guide their purchasing and selling behavior; equilibrium occurs at the intersection point of the supply and demand curves

4. What is the difference between a Classical Hypothesis Test and the p-value? Which method is preferred, the p-value or the Classical Hypothesis Test?

a. Classical hypothesis test - three steps to test whether or not the sample mean is a valid estimate of the popular parameter b. P-value - measure of credibility of the null hypothesis c. P-values are preferred to classical testing

14. Within Sowell's (2018) framework how does Discrimination I differ from Discrimination II? Which one is harmful?

a. Discrimination I: is an ability to discern differences in qualities of people and things, and choosing accordingly b. Discrimination II: is treating people negatively, based on arbitrary assumptions or aversions, concerning individuals of a particular race or sex c. Discrimination II is harmful

7. What are the three views on the causes of inequality? How does each cause affect one's views about the appropriate policies to address inequality?

a. Flawed character - may explain not only distinctions between rich and poor, but also much smaller gradations in income b. Restricted opportunity - may be as instrumental in explaining class divisions as in explaining pockets of poverty c. Big brother - government taxes, expenditures, and regulation rarely effect everyone equally

11. Two measures of inequality are the Gini Coefficient and the Palma Ratio. What does the Gini Coefficient measure? What does the Palma Ration measure? Which measure is preferred? Or, are they complementary?

a. Gini coefficient - a measure of statistical dispersion; it is a single statistic that calculates the area of inequality in the Lorenz curve by measuring how far the Lorenz curve departs from the diagonal line of perfect equality b. Palma ratio - a measure of income or consumption concentration and calculated as the GNI capture of the richest 10% divided by that of the poorest 40% c. The Palma ratio is preferred

1. What is the difference between a Histogram and a Frequency Polygon?

a. Histogram - a graph that displays the data by using contiguous vertical bars of various heights to represent the frequencies of the classes b. Frequency polygon - a graph that displays the data by using lines that connect points plotted for the frequencies at the midpoints of the classes. The frequencies are represented by the heights of the points

3. What are the two proposed basic explanations of poverty in the US by Beeghley (1988)?

a. Individual explanations - job loss, low skills, female family head, discrimination again blacks and Hispanics, family size, age at marriage b. Structural factors - reproduction of the class system, macroeconomic policies, the vicious circle of poverty, the structure of the electoral process, the structure of the economy, institutionalized gender discrimination, institutionalized ethnic discrimination

8. What is the difference between Inequality of Opportunity and Inequality of Outcome?

a. Inequality of opportunity - having a disadvantage because of either a disability or being born into something that puts you on a lower playing field b. Inequality of outcome - the outcome one gets where it seems unfair even though the work and the effort was there.

6. What are the differences in the concepts of the Entry Point to economic transactions, Capital, and the Income of Individuals between Marxian/Political Economy and the Neoclassical School of Economics? Briefly describe each one.

a. Marxian/political economy: analysis of classes, be it in terms of power or in terms of ownership, things are perceived as capital if they are employed in the production process by the use of wage labor, capital is a social relation b. Neoclassical economics: assumes rational self interested individuals who interact via the market in a world of scarce resources, capital is very broad, individuals income depends on their free decision on how much labor to supply

2. What are three measures of Central Tendency? Briefly describe each one.

a. Mean - average b. Median - middle number in a set c. Mode - most frequent value in a set

6. Who developed the first US Poverty Thresholds 1963-64? What was the basis for determining the proportion of total income that should be assumed to be spent for food?

a. Mollie Orshansky b. To determine the proportion of total income that should be assumed to be spent for food, Orshansky used the Agricultural Department's Household Food Consumption Survey, a survey conducted at approximately 10-year intervals

4. What is monetary approach in Neoclassical Economic Theory? How is poverty defined under the monetary approach?

a. Monetary approach - income and consumption take center stage by simultaneously constituting the main variables of interest and the main units of measurement to be employed in any analysis of poverty b. The monetary approach defines poverty narrowly in terms of consumption derivable from current income

8. In their evaluation of the Official Poverty Measure, the National Academy of Sciences Report, in 1995, had six major criticisms of the US Official Poverty Measure. The Report also went on to make recommendations on how to improve upon the OPM. What were the four major recommendations made by the NAS Report about a new measure of poverty?

a. Recommendation 1: the official US measure of poverty should be revised to reflect more nearly the circumstances of the nation's families b. Recommendation 2: poverty thresholds should represent budget for necessities, should be developed using actual consumer expenditure data and updated annually, should be adjusted to reflect the needs of different family types, and family resources should be defined as the sum of money income from all sources together c. Recommendation 3: the US office of management and budget should adopt a revised poverty measure as the official measure for use by the federal government d. Recommendation 4: the statistical policy office of the US office of management and budget should institute a regular review of all aspects of the poverty measure

5. What are the effects of changes in Aggregate Demand (AD) according to Keynesian Economic Theory? What is the role of the government in Keynesian economic theory?

a. Redistribution from the rich to the poor would increase effective aggregate demand and so reduce aggregate unemployment b. Keynesians suggest growth can promote economic development and thus relieve poverty, thereby further justifying government intervention at the macroeconomic level, mainly to tackle unemployment

10. What is the difference between Relative and Absolute Inequality?

a. Relative inequality - assessed in terms of the proportionate differences in society (rich divided by poor) b. Absolute inequality - based on the absolute differences in incomes (rich minus poor)

3. What is the relationship between the Standard Deviation and the Standard Error?

a. Standard deviation - provides a numerical measure of the overall amount of variation in a data set and can be used to determine whether a particular data value is close to or far from the mean b. Standard error - equal to the standard deviation of the theoretical distribution of a large population

10. How does the World Bank's updating of poverty lines, in October 2017, based on the income category of a country affect the poverty shares when compared to the $1.90/person/day criterion? What is the basis for the $1.90 Global Poverty Line?

a. The World Bank began to report poverty rates for all countries including high-income countries, using new international poverty lines by partitioning the world's countries into different income groups - using the World Bank's own income classification of low income, lower middle income, upper middle income, and high income - and then choose a poverty line that is typical of each of those groups of countries, in the same way that the $1.90 line is typical of the poorest countries.

7. In an overlapping Neclassical-Keynesian/Liberal approach, Jeffrey Sachs, in his The End of Poverty, published in 2005, listed the main signs of underdevelopment in a country or region. What six areas did he identify as being at poor levels in an underdeveloped country, or underdeveloped region of a developed country? Sachs said that Economics, like persons, should be seen as complex systems. What is a complex system?

a. The main signs of underdevelopment in a country or region include poor levels of: human capital, business capital, infrastructure, natural capital, public institutional capital, knowledge capital b. Complex systems - where failures in one part lead to failure elsewhere and 'diseases' differ

5. What are three basic metrics for measuring poverty? Which two are really "two sided of the same coin"?

a. The poverty rate, a group's share of the poor, whether or not a group is the majority or a plurality of the poor b. Poverty rate and a group's share of the poor

What are the two general approaches to identifying who is poor?

absolute poverty and relative poverty

How is the Poverty Threshold calculated? What is the difference between Poverty Thresholds and Poverty Guidelines?

b. Poverty threshold is calculated by using the CPI-U c. There is not geographic variation for poverty thresholds but for poverty guidelines, there is one set of figures for the 48 contiguous states and the District of Columbia, one set for Alaska, and one set for Hawaii

What is the Fuchs point? What weakness of the Relative Poverty approach does it seek to address?

c. Fuchs point - defined those with incomes less than ½ of the national Median Income as poor d. Fuchs point makes a distinction between the elimination of poverty, and the elimination of inequality.

What is Horizontal Inequality? How does it differ from Vertical Inequality?

c. Horizontal inequality - people at the same initial income are effected differently or make different efforts d. Vertical inequality - whether absolute or relative refers to the differences in the gains to the "rich", versus the gains to the "poor"

What is the central feature in preventing poverty according to Keynesian economic theory? What is Poverty "Hysteresis"?

c. The central feature in preventing poverty is steady employment d. Poverty hysteresis - current experiences of deprivation can lead to permanent negative scars on people's abilities and their resilience against re-incidence of poverty

What are the two causes of immigrant poverty identified by Raphael and Smolensky (2009)? What is displacement argument? Did Johnson and Mason's (2012) substantiate Raphael and Smolensky's two causes of poverty?

c. Two causes of immigrant poverty: direct effect and indirect effect d. Displacement argument - if the negative externality in the form of lower wages due to higher labor supply following immigration is strong enough, the poverty rate among natives may increase, thereby increasing overall poverty e. Johnson and Mason didn't support the two causes of poverty. They said if anything there is generally significant empirical evidence pointing to a negative link between immigration and poverty

Sen proposed that human welfare should be judged by a person's

capabilities

What were the two reasons Galbraith identified as to why many of the old poor were unable to participate in the new opportunities?

case poverty and insular poverty

Which of these measures is likely to be influenced more by outliers? Which of these measures of Central Tendency is the focus of using the sample statistic to estimate the population parameter? Why?

d. The mean is likely to be influenced more by outliers e. The mean is the focus of using the sample statistic to estimate the population parameter because it approaches a normal distribution as the sample size increases

Which level of thresholds was designated as the Federal Government's official statistical definition of poverty in August 1969?

economy level

The utilitarian case against inequality makes three key assumption. Which of the following is incorrect?

everyone derives different utility from a given income, given their preferences

1. What are three views on the causes of poverty? How does each cause affect one's views about the appropriate policies to reduce poverty?

flawed character, restricted opportunity, big brother

According to Engel's Law - the poorer the family, the share of their budget devoted to food is

higher

Keynes argued that poor families tend to have a _____ Marginal propensity to consume (MCP) out of income gains than do the rich, and that the MCP _____ as income rides

higher, falls

According to the central limit theorem, the sample distribution of mean approaches normal distribution, as the sample size

increases

In understanding poverty in the rich countries in the 1960's, the idea of Dual Labor Markets become prominent. Which of the following is correct about dual labor markets?

one labor market has high wages and good benefits, while the second has low wages and little in the way of benefits

Which of the following is not an example of market failure?

perfect competition

Which of the following persons would be considered in the labor force?

person temporarily not working because of an illness

12. According to Sen, Single-Number Indices of inequality can be divided into two classifications:

positive and normative

Which role of anti-poverty policy was the basis for Juan Luis Vives's blueprint for aiding the poor in his On Assistance to the poor (1526)?

protection rule

What new approach was introduced by Hobbes and then Rousseau?

social contract

Which one of the following are not one of the factors that drove the debate over poor laws?

the number of poor people decreased

What are the four types of poverty traps?

threshold of wealth, schooling poverty trap, geographic poverty trap, coordination failure

Which of the following is true about Ricardo?

wages must remain at the subsistence level