Introduction to EBE

• Economics
• WO
• Studiejaar 1

Introduction to EBE

Tutorial Problem Set 4

Chapter 5: Institutions, Power and Inequality

Exercise I: Formal and Informal institutions

What is an institution?

1. A coherent set of principles and ideas, usually resulting in ideas about the most desirable social and political relationships.
2. The laws and informal rules that regulate social interactions among people and between people and the biosphere, sometimes also termed the rules of the game.
3. The process of transmission and acquisition of the culture of the groups and society to which people belong. The process consists of education, training and other forms of interaction with others.
4. The set of representations, forms of expression, views, values ​​and norms that people have acquired as members of a group or society.

Examples: Formal economic institution

Examples: Formal political institution

Examples: Informal economic institution

Examples: Informal political institution

Discuss how one of the institutions you gave as examples above likely affects economic or political outcomes in terms of income of a group or an individual.

• Formal economic institution 
  

• Formal political institution 
  

• Informal economic institution 
  

• Informal political institution
  

Exercise II: Institutions allocation and fairness

Imagine that you are a university teacher earning 50.000 euro a year...
Who are the main parties involved in this economic transaction?

Describe the allocation - What does what and who gets what? 

Is the allocation fair?

Yes

No

Let someone explain; 

Exercise III: Institutions and the biological survival constraint

Why doesn't Bruno set the working hours of Angela at the maximum where she can still survive?

Describe the tradeoff between Angelas working time and output available for Bruno

Exercise IV: Take it or leave it when Bruno owns the lands

What is the definition of power?

1. A situation in which individuals, groups and/or states work against each other to achieve their own goals.
2. The process of expanding and intensifying contacts and dependencies over very large distances and across national borders.
3. The ability to do and get the things one wants in opposition to the intentions of others, ordinarily by imposing or threatening sanctions
4. Complex of more or less formalized rules that regulate the behavior of people and their mutual relationships.

What is a take-it-or-leave-it offer?

Why is it Bruno who has the power to make a take-it-or-leave-it offer?

Describe a situation in which the farmer, not the landowner, might have this power.

Exercise V: Comparing distributions of wealth

Figure 5.22 shows three distributions of land ownership in a village with 100 people and 100 hectares of land

Draw the Lorenz curve for each case; 

• For case I and III calculate the GINI. 
  
• For case II, show on the Lorenz curve diagram how the GINI coefficient can be calculated.
  

Exercise VI: Measuring income inequality

Two common ways of measuring the within-country inequality are the GINI coefficient and the income share (for example the share of the total national income that goes to the top 10%, top 1% or bottom 50%).

What is the main drawback of using the GINI coefficient?

What is the main drawback of using top 10% or top 1% income shares?

Exercise VII: Interpreting income inequality

Have a look at the figure below. It shows income inequality in market and disposable income across the world. Which of the following statements is/are correct?

I. Countries with a larger difference between market income and disposable income GINI coefficients redistribute more income.
II. Countries with lower GINI coefficients have less equal income distributions.

1. Statement I is true, Statement II is false
2. Statement I is false, Statement II is true
3. Statements I and II are both true
4. Statements I and II are both false

Bye