THEORY OF DISTRIBUTION
OF INCOMES
INCOME AND WEALTH
 INCOME – total amount of
 WEALTH – consists of the net
money received by a person or
household during a given time
period (usually a year). Consists
of:
 wages or labor earnings (about
two-thirds of personal income),
 property income such as rents,
interest, and dividends
(particularly important for highincome groups),
 transfer payments or receipts
from the government, such as
social security or unemployment
insurance.
euro/crown value of assets
owned at a point in time
 In a household’s wealth is
included:
 tangible items (like houses, cars
and other consumer durable
goods, and land),
 financial assets (like cash,
savings accounts, bonds, and
stocks).
INCOME COMPONENTS
The total income of households can be divided
into:
 labor income (YL),
 income from ownership of land and capital
(YA, YK),
 income in the form of transfer payment (YT).
Y = YL + YA + YK + YT
Sources of Inequality in Labor Income

abilities and skills

intensity of work

differences among occupations

differences in education

other factors – f. e. discrimination and exclusion from
certain occupations, good/bad luck
Inequalities in property income

inheritance – many wealthy people inherited a great deal of
their property from their parents or grandparents,

savings – a recent study suggests that only a small fraction
of personal wealth, perhaps 20 %, can be explained by lifecycle savings,

risk taking (doing business) – entrepreneurship seems to be
the surest route to great wealth.
MEASUREMENT OF INEQUALITY
 how substantial is the dispersion of disposable incomes,
and how the degree of inequality of income distribution
can be measured explain diagram known as the
LORENZ CURVE
 Lorenz curve depicts relationship between:



complete equality,
absolute inequality and
actual inequality.
Lorenz curve
Percentage share of
national income (cumulative)
100
80
Line of complete
equality
60
40
Lorenz curve
20
O
O
20
40
fig
60
Percentage of population
80
100
GINI COEFFICIENT
 further tool for measuring of inequality is so called Gini
coefficient, which compares actual Lorenz curve with the
ideal curve. Measures the difference between the area
below the ideal Lorenz curve and the area below the
actual Lorenz curve:
G = A /A+B
 Gini coefficient can vary from 0 to 1.
 G = 1 – corresponds to extreme case of absolute
inequality in incomes
 G = 0 – case of absolute equality in income distribution
Lorenz curve and Gini coefficient
100
Percentage share of
national income (cumulative)
Gini coefficient = A / (A + B)
80
Line of complete
equality
60
A
40
B
Lorenz curve
20
O
O
20
40
fig
60
Percentage of population
80
100
REDISTRIBUTION PROCESSES IN ECONOMY
 primary distribution - the income distribution (wages, interests,
profits and rent) among the households that is result of market
mechanism
 result of income redistribution is final distribution of income – income
was increased by transfer payments (social security, unemployment
insurance, pensions for elderly ..) and decreased by taxes, fines and
other payments to state budget and other funds.
THE EFFECT OF REDISTRIBUTION ON ECONOMIC
ACTIVITY

Administrative costs – there are always associated direct nonproductive (especially administrative) costs with redistribution

The impact on working effort and entrepreneurship –
redistribution processes often weaken the motives to work and
taking risk by entrepreneurship

Impact on savings and investment