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Chapter 31

Chapter 31. Income, Poverty, and Health Care. The price of health care services is continually growing more quickly than the overall rate of inflation. Does this mean that there is a health care crisis? Is government financing of health care necessary?. Introduction. Learning Objectives.

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Chapter 31

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  1. Chapter 31 Income, Poverty, and Health Care

  2. The price of health care services is continually growing more quickly than the overall rate of inflation. Does this mean that there is a health care crisis? Is government financing of health care necessary? Introduction

  3. Learning Objectives • Describe how to use a Lorenz curve to represent a nation’s income distribution • Identify the key determinants of income differences across individuals • Discuss theories of desired income distribution

  4. Learning Objectives • Distinguish among alternative approaches to measuring and addressing poverty • Recognize the major reasons for rising health care costs • Describe alternative approaches to paying for health care

  5. Chapter Outline • Income • Determinants of Income Differences • Theories of Desired Income Distribution • Poverty and Attempts to Eliminate It • Health Care

  6. Did You Know That... • During the 2001-2002 recession, both the highest-income households and the lowest-income households experienced declines in income? • The result was that the U.S. distribution of income became relatively more equal?

  7. Income • Income sources • Payment for a factor of production • Gifts • Government transfers • Distribution of Income • The way income is allocated among the population

  8. Income • Lorenz Curve • A geometric representation of the distribution of income • A Lorenz curve that is perfectly straight represents complete income equality • The more bowed a Lorenz curve, the more unequally income is distributed

  9. Complete equality Inequality gap Actual money income distribution 45° The Lorenz Curve 100 75 50 Cumulative Percentage of Money Income 28 25 0 25 50 75 100 Cumulative Percentage of Households Figure 31-1

  10. Income • Criticisms of the Lorenz curve • It does not include income in kind. • Income received in the form of goods and services • It does not account for the differences in size of households or the number of wage earners households contain.

  11. Income • Criticisms of the Lorenz curve • It does not account for age differences. • It ordinarily reflects money income before taxes. • It does not measure unreported income.

  12. Complete equality 2005 1929 Lorenz Curves of Income Distribution, 1929 and 2005 100 80 60 Cumulative Percentage of Money Income 40 20 0 20 40 60 80 100 Cumulative Percentage of Households Figure 31-2

  13. Percentage Share of Money Incomefor Households Before Direct Taxes Table 31-1

  14. International Example:Income Inequality in the U.S. Figure 31-3

  15. The Distribution of Wealth • The distribution of income is not the same thing as the distribution of wealth. • Income is a flow variable; wealth is a stock. • Income can be viewed as a return on wealth.

  16. Determinants of Income Differences • Age • Age-Earnings Cycle • The regular earnings profile of an individual throughout his or her lifetime

  17. Determinants of Income Differences • Age-earnings cycle • At age 18, earnings from wages are relatively low. • Earnings gradually rise until they peak at about age 50. • Earnings then fall until retirement, when they become zero.

  18. Typical Age-Earnings Profile (Real) Annual Earnings 0 18 25 35 45 55 65 Age Figure 31-5

  19. Determinants of Income Differences • Marginal productivity • Talent • Experience • Training • Investment in human capital

  20. Determinants of Income Differences • Inheritance • 10 percent of inequality traced to inheritance • Discrimination • Different pay for equal MRP • Equal pay for different MRP

  21. Determinants of Income Differences • Access to education • Non-white urban males income is reduced 23 to 27 percent because of low quality education • Discrimination

  22. Example: The Urban-Rural Income Gap in China • The best primary and secondary schools in China are located in the major cities. • The rural schools lag behind in quality. • As a result, the human capital acquired by students in rural areas is declining relative to what is being accumulated by residents of the major cities.

  23. Determinants of Income Differences • Doctrine of Comparable Worth • The belief that women should receive the same wages as men if the levels of skill and responsibility in their jobs are equivalent

  24. Theories of Desired Income Distribution • Productivity • “To each according to what he or she produces.” • Equality • “To each exactly the same.”

  25. Poverty and Attempts to Eliminate It • Mass poverty can no longer be said to be a problem in the Western world. • The U.S. engages in a fair amount of income redistribution. • There is always a need to assess whether the programs are successful.

  26. Official Number of Poor in the United States Figure 31-6 Source: U.S. Department of Labor

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