ECONOMICS
What Does It Mean To Me?
Part VII:
Issues and Policies
in Microeconomics
TOPICS:
Income Inequality & Poverty
Antitrust Policy & Regulation
Agriculture
Labor Market Issues
Health Care
INCOME
INEQUALITY AND
POVERTY
Average Family income in U.S. = $66,863 (2001)
One way to look at inequality in income is to look
at the distribution by families:
Personal Inc Category
% of families
Under $10,000
5.3
$10,000-14,999
4.3
$15,000-24,999
11.3
$25,000-34,999
11.9
$35,000-49,999
15.7
$50,000-74,999
20.8
$75,000-99,999
13.1
$100,000-199,999
14.6
$200,000 and above
3.0
Source: McConnell & Brue, Economics
2001 data
If you then take the categories and divide it into
quintiles, you get:
% of Total Income
Upper Income Limit
Lowest 20 percent
4.2
$24,000
Second 20 percent
9.7
41,127
Third 20 percent
15.4
62,500
Fourth 20 percent
22.9
94,150
Fifth 20 percent
47.7
no limit
Source: McConnell & Brue, Economics
Census Bureau
The Lorenz Curve
The Lorenz
Curve is a graph
of the percentage
of total income
obtained by a
cumulative
percentage of
families
Percentage of Income
100
Perfect
Equality
80
60
40
20
0
20
40
60
80
100
1999 data
The Lorenz Curve
The Lorenz
Curve represents
the degree of
inequality in the
U.S. distribution
of total income.
Percentage of Income
100
Perfect
Equality
80
60
40
20
0
20
40
60
80
100
1999 data
The Gini Coefficient
The Gini coefficient is a ratio of the
areas on a Lorenz curve.
It is also a measure of the inequality of
a distribution.
If the area between the line of perfect equality
and Lorenz curve is A, and the area under the
Lorenz curve is B, then the Gini coefficient is A/(A
+ B).
Since A + B = 0.5, the Gini coefficient is:
G = A/(.5) = 2A = 1 − 2B.
If the Lorenz curve is represented by the function
Y = L(X), the value of B can be found with
integration and:
G=1−2
L(X)dX.
Some important properties of the Gini coefficient are:
1. The Gini coefficient is a measure of inequality of a
distribution. It is defined as a ratio with values
between 0 and1: the numerator is the area between
the Lorenz curve of the distribution and the uniform
(perfect) distribution line; the denominator is the area
under the uniform distribution line.
2. It is often used as a metric of inequality.
3. The higher the Gini coefficient, the greater the
inequality
4. A value of zero corresponds to perfect income
equality (everyone has the same income), while a
value of 1corresponds to perfect income inequality
(one person has all the income, and the rest of the
population has none).
5. It is not affected by the shape of the Lorenz curve,
only by the ratio of the areas used to compute it.
6. It does not indicate how the inequality is distributed,
only the total amount of inequality.
7. The Gini coefficient can be used to indicate how a
distribution changes over time and if this change
shows thatequality is increasing or decreasing
The Lorenz Curve
The Lorenz
Curve after
taxes and
transfers
100
Percentage of Income
The distribution of
personal income is
significantly more
equal after taxes
and transfers are
taken into account
than before.
80
60
40
20
0
20
40
60
80
100
1999 data
The End
Created by:
Virginia Meachum, Economics Teacher, Coral Springs High
School
Sources:
McConnell & Brue, Economics