NOTE HALL.
COM STUDY GUIDE FOR INDV 103
50 MC Questions 19 Is Higher Education Worth the Cost? (Chapters 29 & 30) 31 Income Distribution & Poverty (Chapters 32, 41, 42) STUDY THIS BEFORE TAKING THE ONLINE MIDTERMS FOR PRACTICE Higher Education Subsidies to higher education benefits who? o Subsidies benefit those below poverty threshold, merit-based, military scholars, etc. Government role/loan market: o The government role in America is just to subsidize education or encourage education to establish a more educated workforce and population. o The following are 3rd party payments for students: Need-based financial aid: Perkins loans: low interest loans o For students w/ exceptional financial need PLUS loans: allow parents to borrow money for childrens college education Supplemental Educational Opportunity Grant (SEOG): federal award for exceptional financial need in college Work-study programs: jobs on campus to pay for tuition and are federally financed. Merit-based financial aid: scholarships Academics, athletics, etc. Subsidized Stafford Loans: federal aid Source of funds private/public universities o Private: Fees/Tuition (tuition is the main source of funding)
Alumni donations o Public: State government subsidies Fees/tuition Alumni donations Major government subsidies (some of these are re-described from above) o Subsidized Stafford Loans: federal aid Low-interest loans, no-payment until after studying (fed govt pays interest while in school) Average loan size: $3,000 o Perkins loans: very low interest loans For students with exceptional financial need o Pell grant: one of the most important grants for needy families. o NOT A LOAN For low income families ($40k/year) # of recipients: 5.4 million Max size of grant: ~ $5,000 Lower income, higher grant Rationalization of subsidies to university students: o More lower-income students will be able to afford high-level education o Subsidizing students will make more students go to university; with more students at university, more white-collar (high-end) jobs will be created and therefore society (the country) will benefit because the country moves closer to a service-producing nation rather than a goods-producing nation. Total lifetime earnings differential between H.S and College: o Difference in total earnings Civilian Labor Force Participation Rate: o The proportion of the civilian noninstitutional populations that is actively participating in the civilian labor force. Formula: (civilian labor force)/(Population) gives a rate or x100 gives a % Population is above 16 years older and not in institutions Calculate present value: we can calculate 2 amounts paid at different times from other another. o Used for investment purposes, to see if money can be made with the interest rate o Present value = (Payment)/(1+r)n Payment= payment to be received in the future r= interest rate n= number of years before payment is received Present value: the interest-adjusted value of future payment
i.e: you expect to receive a dividend of $200 in 5 years. To calculate the present
value of that dividend, you would first answer the variables presented above:, r, n. The interest rate is 10%.
Present value = ($200)/(1+0.10)5 = $124.18 Meaning: if you are going to receive this $200 dividend down the road, you would sell the right to that $200 dividend for $124.18 Costs of higher education: o Cost has risen because of: Rising demand Demand stays high because of 3rd party payments such as federal loans, grants and scholarships. It makes one less likely to feel the impact of the higher price, much like insurance with healthcare. As demand increases, demand for new buildings for the university increases, which increases cost significantly because of high marginal cost of buildings As demand increases, tuition increases, fees increase Lack of Market Discipline: Universities dont run on a business model; the demand for the college isnt always dependent on low prices. The highest ranking colleges in the U.S have the highest tuition. Their stocks arent traded. De-emphasis of Undergraduate Education: Many universities emphasize their graduate programs more which are much more costly (research, more expensive equipment) with less students; much of the financial burden placed on undergraduates. Student: Staff increased over time More teachers per students o 1 professor:10 students, etc. as opposed to more efficient such as 1:100, 1:200 Better Lives for Staff Faculties share increased income of universities Professor salaries increased by 50% since 1980 Teaching loads have fallen (teachers not doing much) Employment Definitions: o Structural unemployment: unemployment due to lack of literacy, skill, talent, or they live in different regions than where the job is, etc. This is always present even in a good-standing economy. o Cyclical unemployment: unemployment due to business cycle (economic recession to economic boom) o Frictional unemployment: unemployment of people being temporarily between jobs, searching for new ones
o Seasonal unemployment: where specific industries or occupations are characterized by seasonal work which may lead to unemployment Such as ski-park workers, dress-up Santas, Natural unemployment contains frictional, and structural because these will always happen but cyclical is because of the economy. From midterm test practice: (questions 31-33) The Labor force: everyone that can work; Employed + Unemployed 95 million + 7 million = 102 million Unemployment rate: unemployed / total labor force 7 million / 102 = 6.9% Cyclical Unemployment: Total Unemployed natural unemployment(5 million in question 33) 7 million 5 million = 2 million United States has 4% full-employment, because 4% is our natural unemployment rate
Starting salaries of graduates: o Engineering makes most money o Business degrees make a lot of money too; sciences, teaching are worst. Degree 1. Engineering 2. Comp. Program. 3. Mathematics 4. Economics [Link] [Link] 7. History 8. Elem. Teacher 9. Philosophy Start Salary $49, 707 $46, 775 $46, 405 $43, 419 $42, 104 $41, 638 $34,257 $30, 497 $28, 234
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Differential tuition/fees by major o Not at UA; have at differential tuition by college: eller has 800$ differential (800 more than tuition and fee rate) o Diff tuition fees based on supply and demand; why? Think about it
Earnings graph/HS/University grad
From SLA session
Y-axis is earnings, X-axis is time Curve H is for a Highschool-only graduate o Areas B and F are the total lifetime earnings for a H.S student Curve C is for a College graduate o Area A is negative, and is the money spent on additional schooling, such as books, tuition, fees, etc. o Areas E and F added are the total earnings for a college student E is on top of F(earned by high school) so E is additional earnings by having a university education o Because A is what the college student spends, and because B is what the college student does not earn (while in school) and the highschool graduate does, A+B is the opportunity cost of the college student. o Because B are earnings that the college student could have obtained that the high school student did, B represents earnings foregone. o If a highschool student considers college, he/she must consider the net benefit of a college education; that is: if area E, the additional earnings by a college graduate is greater than: (B+F)earnings in high school + A (the cost of going to college) Also to be considered is that if non-monetary values were added to the graph, area E would increase because the job is more specialized and more likely to vary, contribute to society or more enjoyable Investment in human capital: See the reasoning in the above chart ^^ o For a person: investing in human capital means going to university to invest in increase in skill; it would be considering that the increased earnings are greater than all of the direct and indirect costs of going to college (such as time spent, tuition, etc.)
o For a country as a whole: Investing in people to generate skills that benefit the economy: aka education. o Expandable and self generating with use: as doctors get more experience, their knowledge base will increase, as will their endowment of human capital. The economics of scarcity is replaced by the economics of selfgeneration.1 Income Distribution Quintile (20% of 100%) Highest/lowest quintiles in the U.S; solve for in Lorenz curve. Example to follow graph. o LOWEST QUARTILE: receives 4% of total income o HIGHEST QUARTILE: receives 40% of total income
Lorenz Curve: shows the actual income distribution
From: [Link]
o The line of perfect equality: at any point there is perfect income equality (i.e: the bottom 60% of people have 60% of the income. o Used for reference o i.e: the lowest 20% of households hold 10% of the income o i.e: 80% of the families receive 60% of income o How much does the top 20% receive? (look at graph) o 80% of bottom receives 60% of wealth 1. 100%(all income) 60% (received by bottom 80) equals 40% of income is received by top 20% Lorenz Curve Analysis that you should understand:
1. Does not take into account an income in kind so the poor arent as bad. 2. Doesnt differentiate with the size of families. It makes a big difference if its spread around 2, 3, 6 people, etc. 3. Doesnt take into account age differences. 4. It is pre-taxed income; (inequality is reduced when a progressive income tax is introduced) Gini ratio (Definition, High/Low): Important o ratio of area between the line of perfect equality and the observed Lorenz curve to the area below the Lorenz curve Easier to understand: comparison of area between green and red lines to the area below the red line. o (Ranges from 0-1) closer to 0 the more equal distribution is in the society (good thing) closer to 1 is more unequal (not so good thing) o The U.S has a very low Gini coefficient compared to South American countries whose wealth is VERY concentrated at the top quartile Why is there income inquality? o Education, not everyone has the same education or means to get one More education=more money o Money makes more money o Which industry the workers are in? o Geography (different parts of country cost more or pay more) o The person someone marries $50k income + $50k income = $100k income Income level increases but costs dont so Cost of living increases o Ability: changes with person to person. Some people can sing, paint, other cant. etc. o Discrimination: men vs. women, white vs. black, etc. o Luck: get sick, disabled, etc. o Nativity Born in America = higher income potential Foreign born move to America= lower income potential Legal vs. illegal immigrants, etc. o Wealth (different from income): financial investments, property, stocks/bonds, bank accounts, art Wealth generates income. More unequally distributed than income. o Wealth(stock variable, assets) vs. Income(flow variable, periodic dividends) this is mentioned previously too Income highly unequal, wealth more highly unequal A definition: Average Net Worth:
Assets minus liabilities (debts). Growing income inequality: o More opportunities for rich to become richer with internet, etc. o From 1929 to 1997 income distribution has become a lot more equal bigger shift to a middle-class centered economy. o From 1997 to 2007 the income distribution has become less equal Larger tax-loop-holes for rich, tax deductions, tax cuts, etc. Poverty rates/different groups o Overall(in U.S) : 12.5% which is 37.3 million Americans o Poverty by Race: Colored people, blacks/Hispanics especially, are more inclined to be poor than Whites. Poverty among Whites: 8.2% Poverty among Blacks: 24.5% Poverty among Asians: 10.2% Poverty among Hispanics: 21.5% o Poverty by Nativity: If someone is born in America they are much less likely to be poor. Native American: 11.9% Foreign Born: 16.5% Naturalized citizen: 9.5% Not a citizen: 21.3% o Poverty by Type of Family: More likely for single female to be in poverty Married couple(male & female): 4.9% Female householder, no husband: 28.3% (will be on exam) Male householder, no wife: 13.2% (will be on exam) Official poverty line (know these approximations) o Figured out by minimally adequate diet o 1 person: $10,590 per year o 4 persons: $21,203 per year Median household(1-5 people) income currently: o $50,233.00 in 2007; differs according to state Highest income state: Maryland - $62,000 median Lowest income state: Mississippi- $37,000 median Arizona - $47,000 median Income maintenance programs/types: o All the welfare programs, unemployment insurance from government, etc public assistance programs AND social insurance programs Social Security has the greatest spending In-kind benefits: A.K.A entitlements o Welfare is NOT the same as entitlements; Public assistance is welfare not social insurance
o Non-welfare entitlements: Social Insurance Programs: Social Security: cash benefit GREATEST SPENDING benefit for 66 years and older We pay 6.2% of salary until you pay 102,000 then no more deduction; employer matches other 6.2% Medicare: subsidized health insurance for old 1.45% income tax into medicare, employer matches it with 1.45% o Welfare programs: Public Assistance Programs food stamps: government spends $30.2 billion nationwide TANF program: know these provisions for the test Temporary Assistance for Needy Families (TANF): o From Welfare Reform Act of 1995 o A.k.a: Personal Responsibility Act o Cash for certain families with children o Encourages people to move from welfare to work o Can only collect welfare for 2 years without a job. o Can only collect TANF benefits 5 years over life Medicaid: health insurance for needy ^^ Spending is highest in our welfare programs as opposed to the non-welfare ^^ Program rewarding/not rewarding lower income people for their work effort o Encourage to work, help at same time? The TANF helps people find jobs, and you can only collect it for 5 years over life time o Which of the following would encourage people to work more, which would not? This will be a question on the test; think about what TANF does, and answer question using your logic.
1: [Link]