Inequality

One of the biggest problems in todays world is the widening poverty gap between developed and less developed countries.

One of the main economics objectives is to achieve equity, which means fairness or evenness. It is difficult to define and measure. Hence, it is seen as a normative concept. Many economist relate equity to how fairly income and opportunity are distributed between different groups in a society.

Inequality of opportunity:

This occurs when people cannot access employment or institutions. These people cannot benefit from living as much as others in a market economy. 

Example: some children cannot access education, which leats to lower income in the future and lower living standards.

Inequality of outcome:

This happens when some people gain more than others from a transaction. 

Measure of inequality:

Inequlity can be measured by analyzing income distribution. Income distribution can be visualized by looking at a Lorenz curve.

The Lorenz curve shows % of income earned by a given % of population. Perfect income distribution would occur when each % of the population would get the same % of income. For example, Where 75% of the population get 75% of the national income. On the diagram above, income is not equally distributed. 75% of the population only gain 35% of the national income.

Gini coefficient:

This is a mathematical tool, which is used to compare income distributions between different countries. The range is from 0 to 1. The closer the coefficient is to 1 the greater the inequality

Balance of Payments: Introduction

Balance of payments shows the countries transactions with the rest of the world. The inflows and outflows of this are catagorized into different sections:

1. Current account(CA) balance of payments
2. Fiscal account (capital) balance of payments

Balance of payment problems

Trading goods and services forms the largest part of countries current account. It also includes primary (refering to international payments of factors of production i.e. investment income and compensation to employees) and secondary income(refering to transfer payments flowing between countries i.e pension payments and oversea aids) flows. 

Example of UK's current account balance:

The trade balance is a part of the current account and refers to trades in goods and services between the country and the world. UK's trade balance example:

The current account defecit can be a problem when:

1. There are no compensating inflows of investment income or inward capital account flows.
2. The economy has a poor record of repaying debt.
3. It is a persistent deficit that does not self-correct over time.
4. The deficit forms a large share of GDP.
5. The central bank has low reserves.