Answers may include:

Definition

• Multidimensional Poverty Index (MPI): A composite measure that assesses multiple deprivations at the household level in three dimensions—health, education, and standard of living—and combines them into a single index.
• Poverty: A state in which individuals lack the financial resources and basic capabilities to maintain a minimal standard of living.

Explanation/Economic Theory

• Purpose of the MPI

  • Extends beyond income-focused measures to incorporate a range of deprivations that individuals or households face.
  • Highlights the multifaceted nature of poverty, addressing health, education, and standard of living in combination.

• Dimensions and Indicators

  • Health Dimension: May include indicators such as nutrition and child mortality.
  • Education Dimension: Often measured through years of schooling and current school attendance.
  • Standard of Living Dimension: Common indicators include access to electricity, sanitation, safe drinking water, type of flooring, cooking fuel, and ownership of basic assets.

• Weighting System

  • Each dimension is assigned equal weight (for instance, health, education, and standard of living might each account for one-third of the overall measure).
  • Specific indicators within each dimension carry sub-weights, ensuring a balanced approach to capturing multiple aspects of deprivation.

• Identifying Multidimensionally Poor Households

  • A household is considered multidimensionally poor if it is deprived in a certain combination of weighted indicators (commonly at least one-third of the total).
  • This threshold-based identification reveals both how many people are deprived and the intensity of their deprivations.

• Calculation of the MPI

  • Involves two core components:
    • Incidence (H): The proportion of the population identified as multidimensionally poor.
    • Intensity (A): The average proportion of indicators in which poor households are deprived.
  • The index is obtained by multiplying H and A, ensuring both the breadth and depth of poverty are captured in a single figure.

• Use in Policy and Comparison

  • Policymakers analyze MPI results to identify the most urgent deprivations and prioritize interventions (for example, improving health services or education access).
  • The index enables comparison across regions and over time, helping governments and international organizations track progress in reducing poverty levels.

Diagrams

• No diagrams are required.

Answers may include:

Definition

• Equity in income distribution: Fairness in how income and wealth are shared within an economy, often measured using tools such as the Gini coefficient or Lorenz curve.
• Progressive tax system: A taxation structure where individuals with higher incomes pay a higher proportion of their income in tax compared to those with lower incomes.

Explanation/Economic theory

• Income inequality and its causes

  • Market-based income distribution can lead to disparities, as those with higher-skilled labor or capital earn more.
  • Without intervention, the gap between high- and low-income groups may widen, creating inefficiencies and social issues such as reduced social mobility.

• Role of progressive taxes

  • In a progressive system, higher earners pay disproportionately more.
  • This helps reduce post-tax income inequality by compressing disposable income differences.
  • Increased tax revenue can be allocated to social programs (e.g., education, healthcare, welfare payments) benefiting lower-income groups.

• Redistributive effect

  • Shifting part of higher incomes to fund public goods or transfer payments can improve equity, as it raises the standard of living for lower-income households.
  • Helps address market failures associated with unequal opportunities (e.g., lack of access to quality education).

• Possible drawbacks

  • High marginal tax rates may discourage work, savings, and investment among top earners.
  • Potential for tax evasion or capital flight if rates are seen as excessive.
  • Administrative complexities and costs associated with monitoring and enforcing higher rates on high earners.

Diagram

• Shift in Lorenz Curve to be closer to the line of perfect equality.

Evaluation

• Short-run vs. long-run impacts

  • In the short run, progressive taxes can reduce disposable income for high earners while boosting government revenue to fund social programs.
  • Over the long run, there could be reduced incentives to work or invest if top rates are too high, potentially limiting economic growth and overall tax revenue.

• Real-world examples

  • Nordic countries (e.g., Sweden, Denmark)
    • Have top marginal income tax rates often above 50%.
    • Exhibit some of the lowest Gini coefficients globally (e.g., around 0.27 for Sweden), reflecting relatively high equity.
    • Significant government revenue is invested in universal healthcare, education, and extensive welfare benefits.
  • United States
    • Operates a progressive federal income tax system but has a higher Gini coefficient (approximately 0.41).
    • Despite progressive rates, various deductions and lower top rates compared to Nordic countries can result in less pronounced redistribution.
      Conclusion
    • Progressive taxes can be highly effective if accompanied by well-targeted government spending.
    • Other policies (e.g., transfer payments, subsidies) may be necessary to address any disincentives to work and to cover gaps not fully addressed by taxation alone.
      • Other methods to reduce inequality
        • Transfer payments (unemployment benefits, social security).
        • Minimum wage legislation and subsidies targeting low-income groups.
        • These can complement a progressive tax system or serve as alternative approaches.
    • The most suitable policy mix can depend on a country’s economic conditions, cultural context, and political climate.