MGT 382 Macroeconomics Spring 2018 Homework 1 1) Consider the economy of the sma
ID: 1148740 • Letter: M
Question
MGT 382 Macroeconomics Spring 2018 Homework 1 1) Consider the economy of the small country of Oz. One thousand people live in Oz. It has a per capita GDP (national income) of $2000/yr. That income is earned in a very uneven way. One person, Richie Rich, earns $1m and the other 999 earn $1000/yr. In order to make the economy fairer, the government taxes away all but $2000 of Richie Rich's income and distributes it equally to every other citizen (thus giving everyone s2000). Has the government of Oz solved to problem of income inequality? Explain including any important assumptions.Explanation / Answer
1) Per capita GDP of Oz = $2,000/yr. Population of Oz = 1,000 people.
Total GDP = $2,000 x 1,000 = $2,000,000
Richie Rich’s income = $1 million.
Richie Rich’s $998,000 is taxed for income redistribution.
Income available for redistribution for 999 people = $1,998,000.
Per capita income now for 999 people = 1,998,000/999 = $2,000.
After redistribution, the per capita income per year including Richie Rich turns out to be exactly $2,000 per year.
Income redistribution is generally understood to be a desirable and justifiable societal goal on the grounds of fairness alone. Greater income inequality is believed to be associated with poorer health. Just income redistribution alone is unlikely to contribute sustained reduction in health inequities in the absence of other societal policies such as primary health care, public education, and social security.
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