Question

The following income distribution data are for Brazil. Quintile Percent Share Lowest 20% 3.0% Second quintile 6.9% Third quintile 11.8% Fourth quintile 19.6% Highest 20% 58.7% Highest 10% 43.0%。

(e) Suppose one percent of national income were transferred from the richest 20% of households to the poorest 20% of households. Show the effect on relative inequality.

(f) Under the same transfer, what is the effect on poverty?

Answer 1

From the above data we can clearly there is huge ineuality in income distribution.the most of the national income holds by the rich individuals of the country and the poor peoples lives in severe poverty.

a)in this diagram we are putting the data and represents the graphical picture of income inequality.here in vertical axis we measure income and horizontal.axis we measure population.the straight vertical line OA denotes no inequality of income distribution.the more fluctuation from this means the more inequality.OBA is the lorenz curve for Brazil which shows how much income inequality presents there.now if we transfer one percent of national income from the richest group to the poorest group then also this figure looks like quite similar.there would be some negligible minor changes.but it has a huge economic impact.the richest 10% individual holds 43% of income and if we take only 1% then also they holds 42%of national income so it doesn't impact them much.and the higher 20%people holds almost 59% of national income it means the rest of the 80% individual holds only 40% which is lesser than the highest 10% individuals holding.so only one percent transfer doesn't has any impact upon the ineuality to the country.it belongs the same.

b)although from the one percent transfer it has no impact on inequality but it has huge impact on poverty as we can see there holding is only 3% and after 1% increase it becames 4% it means there income holdings increases by neraly 33% than before.which is quite good if we compare it to the initial stages.as the poorest people suffers from severe poverty then an increase of their income by 33% than previous means they are now in better situation.some of them can found himself above the poverty line.there are some basic needs to live but the poorest people doesn't fulfill all the basic needs but if there income increases then they can fulfill some more.and they can demand more good quality goods which may increase the aggregate demand of whole country.