(BQ) Part 2 book "Economics" has contents: Inequality, trade, the data of macroeconomics, the real economy in the long run, the real economy in the long run, the macroeconomics of open economies, short run economic fluctuations, international macroeconomics,.and other contents. | PART 8 INEQUALITY 18 INCOME INEQUALITY AND POVERTY T ‘ he only difference between the rich and other people,’ Mary Colum once said to Ernest Hemingway,‘ is that the rich have more money.’ This may be so but the statement leaves many questions unanswered. The gap between rich and poor is a fascinating and important topic of study – for the very rich, the comfortably rich, for the struggling poor, and indeed for all members of a modern economy. If Hemingway had studied economics, he might have used this reply: ‘Yes, but why are they so rich while others are not so rich?’ From the last chapter you should have some understanding about why different people have different incomes. A person’s earnings depend on the supply and demand for that person’s labour, which in turn depend on natural ability, human capital, compensating differentials, discrimination and so on. The factors that determine wages are also largely responsible for determining how an economy’s total income is distributed among the various members of society. In other words, they determine who is rich and who is poor. In this chapter we discuss the distribution of income – a topic that raises some fundamental questions about the role of economic policy. One of the Ten Principles of Economics is that governments can sometimes improve market outcomes. This possibility is particularly important when considering the distribution of income. The invisible hand of the marketplace acts to allocate resources efficiently, but it does not necessarily ensure that resources are allocated fairly. As a result, many economists – although not all – believe that the government should redistribute income to achieve greater equality. In doing so, however, the government runs into another of the Ten Principles of Economics: people face trade-offs. When the government enacts policies to make the distribution of income more equitable, it distorts incentives, alters behaviour and makes the allocation of
