Growth and Equity (2.3C and D)

Economic Growth syllabus requirements

The meaning of economic growth

• Define economic growth as an increase in real GDP.

HL Requirement:

• Calculate the rate of economic growth from a set of data.

Causes of economic growth

• Describe, using a production possibilities curve (PPC) diagram, economic growth as an increase in actual output caused by factors including a reduction in unemployment and increases in productive efficiency, leading to a movement of a point inside the PPC to a point closer to the PPC.

• Describe, using a PPC diagram, economic growth as an increase in production possibilities caused by factors including increases in the quantity and quality of resources, leading to outward PPC shifts.

• Describe, using an LRAS diagram, economic growth as an increase in potential output caused by factors including increases in the quantity and quality of resources, leading to a rightward shift of the LRAS curve.

• Explain the importance of investment for economic growth, referring to investment in physical capital, human capital and natural capital. • Explain the importance of improved productivity for economic growth.

Consequences of economic growth

• Discuss the possible consequences of economic growth, including the possible impacts on living standards, unemployment, inflation, the distribution of income, the current account of the balance of payments, and sustainability

Equity in the distribution of income

The meaning of equity in the distribution of income

• Explain the difference between equity in the distribution of income and equality in the distribution of income.

• Explain that due to unequal ownership of factors of production, the market system may not result in an equitable distribution of income.

Indicators of income equality/inequality

• Analyse data on relative income shares of given percentages of the population, including deciles and quintiles.

• Draw a Lorenz curve and explain its significance.

• Explain how the Gini coefficient is derived and interpreted.

Poverty

• Distinguish between absolute poverty and relative poverty.

• Explain possible causes of poverty, including low incomes, unemployment and lack of human capital.

• Explain possible consequences of poverty, including low living standards, and lack of access to health care and education.

The role of taxation in promoting equity

• Distinguish between direct and indirect taxes, providing examples of each, and explain that direct taxes may be used as a mechanism to redistribute income.

• Distinguish between progressive, regressive and proportional taxation, providing examples of each.

HL Requirement:

• Calculate the marginal rate of tax and the average rate of tax from a set of data.

Other measures to promote equity

• Explain that governments undertake expenditures to provide directly, or to subsidize, a variety of socially desirable goods and services (including health care services, education, and infrastructure that includes sanitation and clean water supplies), thereby making them available to those on low incomes.

• Explain the term transfer payments, and provide examples, including old age pensions, unemployment benefits and child allowances.

The relationship between equity and efficiency

• Evaluate government policies to promote equity (taxation, government expenditure and transfer payments) in terms of their potential positive or negative effects on efficiency in the allocation of resources.

Day 1:Growth

Goals for the day:

The meaning of economic growth

• Define economic growth as an increase in real GDP.

Causes of economic growth

• Describe, using a production possibilities curve (PPC) diagram, economic growth as an increase in actual output caused by factors including a reduction in unemployment and increases in productive efficiency, leading to a movement of a point inside the PPC to a point closer to the PPC.

• Describe, using a PPC diagram, economic growth as an increase in production possibilities caused by factors including increases in the quantity and quality of resources, leading to outward PPC shifts.

• Describe, using an LRAS diagram, economic growth as an increase in potential output caused by factors including increases in the quantity and quality of resources, leading to a rightward shift of the LRAS curve.

• Explain the importance of investment for economic growth, referring to investment in physical capital, human capital and natural capital. • Explain the importance of improved productivity for economic growth.

Consequences of economic growth

• Discuss the possible consequences of economic growth, including the possible impacts on living standards, unemployment, inflation, the distribution of income, the current account of the balance of payments, and sustainability

Homework: read pp328-336; 340-343

Day 2: Equity: Intro, Indicators and Poverty

Goals for the Day:

The meaning of equity in the distribution of income

• Explain the difference between equity in the distribution of income and equality in the distribution of income.

• Explain that due to unequal ownership of factors of production, the market system may not result in an equitable distribution of income.

Indicators of income equality/inequality

• Analyse data on relative income shares of given percentages of the population, including deciles and quintiles.

• Draw a Lorenz curve and explain its significance.

• Explain how the Gini coefficient is derived and interpreted.

Poverty

• Distinguish between absolute poverty and relative poverty.

• Explain possible causes of poverty, including low incomes, unemployment and lack of human capital.

• Explain possible consequences of poverty, including low living standards, and lack of access to health care and education.

Is Income Inequality good?

1. Part 1 – Opinion

Prepare to discuss: Is unequal distribution of income market failure or not? Should the government address it?

2. Part 2 – Your Country’s Distribution

Research your home country’s Lorenz Curve and Gini Coefficient – download that graph and data in this part.

3. Part 3 – How can countries deal with absolute poverty?

Watch the videos below (and research more if you're interested) and decide for yourself whether or not you think the government should use tax dollars to pay for welfare programs or whether private charity might be more effective in tackling poverty.

Homework: Read pp344-353

Day 3: How to Promote Equity

Goals for the Day:

The role of taxation in promoting equity

• Distinguish between direct and indirect taxes, providing examples of each, and explain that direct taxes may be used as a mechanism to redistribute income.

• Distinguish between progressive, regressive and proportional taxation, providing examples of each.

Other measures to promote equity

• Explain that governments undertake expenditures to provide directly, or to subsidize, a variety of socially desirable goods and services (including health care services, education, and infrastructure that includes sanitation and clean water supplies), thereby making them available to those on low incomes.

• Explain the term transfer payments, and provide examples, including old age pensions, unemployment benefits and child allowances.

The relationship between equity and efficiency

• Evaluate government policies to promote equity (taxation, government expenditure and transfer payments) in terms of their potential positive or negative effects on efficiency in the allocation of resources.

Alpaca Inequality:

The pros and cons of income inequality:

Capital:

Land of the Free, Home of the Poor:

Does Inequality Lead to Financial Crisis?:

What causes income inequality?

Why do ceos make so much money?:

How poverty changes your brain:

Margaret Thatcher on Inequality:

What should be done? Taxes:

One View of the Progressive Tax:

Do Federal taxes reduce income inequality?

And another:

Taxes: How high is too high?

Does this change your opinion of a progressive tax? What are some unforseen drawbacks of the U.S. tax system taxing the wealthy so much? Reduced employment?

What woud REALLY happen if we lowered taxes for the wealthy? Does Economic theory differ from reality?

Taxation discussion:

Which tax system you think is most fair, and why.

Which is more important: equity or efficiency? Why?

Is capitalism and the free market moral?

Practice Paper 1:

a. Using a Lorenz curve diagram and examples, distinguish between a country with a high level of income inequality and one with a low level of income inequality.

b. Justify the claim that poverty's consequences make its elimination the most important objective of economic policy.

Example response

How would you mark this response?

Another:

a. Distinguish between progressive, regressive and proportional taxation, providing examples of each.

b. Evaluate the effectiveness of a progressive income tax at bringing about amore equal distribution of a nation's income.