1. The following income distribution data are for Brazil. Quintile Percent Share

Question

1.    The following income distribution data are for Brazil.

Quintile

Percent Share

Lowest 20%

3.0%

Second quintile

6.9%

Third quintile

11.8%

Fourth quintile

19.6%

Highest 20%

58.7%

Highest 10%

43.0%

Suppose one percent of national income were transferred from the richest 20% of households to the poorest 20% of households. Show the effect on relative inequality. (2 points)

Quintile

Percent Share

Lowest 20%

3.0%

Second quintile

6.9%

Third quintile

11.8%

Fourth quintile

19.6%

Highest 20%

58.7%

Highest 10%

43.0%

Explanation / Answer

The richest 20% hold 58.7% of the wealth therefore a transfer of 1 percent from the richest to the poorest is close to 2 million, this will increase the wealth of the poor by 32% (a substantial amount). This will impact on the headcount if there is poverty. And in terms of income gap ratio it would decrease the shortfall from the poverty line.

Effect on relative inequality-

The Gini coefficient becomes shorter

The Lorenz curves shifts to right

Regressive transfer from low income to high income increases inequality measures.

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