Assignment
1. Consider the distribution of income before taxes and transfers in a country. Suppose that the bottom 4 quintiles of the population in the country each hold 5% of the total income, leaving the fifth (i.e., the richest) quintile holding 80% of the income in the country.
(a) Sketch the Lorenz curve for this distribution of income. Be sure to label each point, all lines, and each axis appropriately.
(b) Calculate the Gini coefficient for the distribution of income before taxes and transfers in this country.
(c) The Gini coefficient in the United States before taxes and transfers is approximately 0.49. Based on a comparison of Gini coefficients, is the distribution of income in this country more or less unequal than the distribution of income in the United States? Briefly explain your answer.
(d) Briefly discuss one concern with interpreting the level of inequality represented by a Gini coefficient.
2. Consider the four primary reasons for increasing wage and salary inequality in the United States: deindustrialization, the decline of unionism, increased demand for skilled labor, and demographic changes in the supply of labor. Which of these possible explanations for in- creasing wage and salary inequality seem least consistent with the following fact? The distribu- tion of earnings has become more unequal within industries (both goods and service industries) and within age groups. Briefly explain your answer.
3. Consider a very small economy in which the working population provided 3 million employee-hours in the private sector and produced 5.4 million units of real private sector output over the course of the year in 2014. Labor productivity for this economy in 2010 was 1.2. Labor productivity in this economy for 2013 was 1.86.
(a) Using 2010 as the base year, calculate (i) the labor productivity index for this economy in 2014, and (ii) the labor productivity index for this economy in 2013.
(b) Calculate the economy's growth rate in labor productivity from 2013 to 2014.
(c) Offer one possible cause of this observed growth rate in labor productivity from 2013 to 2014. Briefly explain your answer.