6.5 Income and Wealth Inequality

• What statistical measure is often used to measure income inequality?

  Gini coefficient
• Wealth inequality refers to the uneven distribution of assets like real estate, stocks, and savings
• The Gini coefficient for wealth inequality ranges from 0 to 1, where 0 indicates perfect equality.
• Match the inequality type with the assets considered:

  Income Inequality ↔️ Wages, salaries, earnings

  Wealth Inequality ↔️ Real estate, stocks, savings
• The Gini coefficient ranges from 0, which indicates perfect equality
• What is the Gini coefficient calculated by dividing?

  Area between Lorenz curve and equality line by total area under equality line
• A Gini coefficient of 0.6 indicates high income inequality.
• The Gini coefficient is calculated using the area between the Lorenz curve and the line of perfect equality
• Steps to measure wealth inequality using the Lorenz curve:

  1️⃣ Plot cumulative percentage of population against cumulative percentage of wealth

  2️⃣ Draw the Lorenz curve below the line of equality

  3️⃣ Calculate the area between the Lorenz curve and the line of equality

  4️⃣ Compute the Gini coefficient
• Match the Gini coefficient value with its interpretation for wealth inequality:

  0 ↔️ Perfect equality

  0.4 - 0.5 ↔️ Moderate inequality

  1 ↔️ Complete inequality
• What is one factor that contributes to both income and wealth inequality?

  Education
• Specialized skills are in demand, commanding higher wages
• Inherited wealth is a significant factor contributing to wealth inequality.
• What type of biases can limit income and wealth accumulation for certain groups?

  Discrimination
• Technological change, such as automation, can displace lower-skilled jobs
• What does the Gini coefficient measure?

  Income inequality
• The Gini coefficient ranges from 0 to 1.
• The Gini coefficient is calculated by dividing the area between the Lorenz curve and the line of perfect equality
• What is the formula for the Gini coefficient in terms of the Lorenz curve?

  $G =$$1 - 2 \int_{0}^{1} L(x) dx$
• Match the Gini coefficient value with its interpretation:

  0 ↔️ Perfect equality

  0.2-0.3 ↔️ Low inequality

  0.4-0.5 ↔️ Moderate inequality

  0.6-0.7 ↔️ High inequality

  1 ↔️ Complete inequality
• The Lorenz curve lies above the line of perfect equality.

  False
• The Gini coefficient for wealth inequality is calculated using the area between the Lorenz curve and the line of perfect equality
• What are key factors contributing to income and wealth inequality?

  Education, skills, inheritance
• Bias against certain groups can contribute to wage inequality.
• Income inequality can reduce aggregate demand
• What is a negative implication of income inequality for economic growth?

  Reduced aggregate demand
• Match the social implication with its effect of income inequality:

  Health disparities ↔️ Lower health outcomes

  Educational inequality ↔️ Unequal access to quality education

  Social mobility ↔️ Reduced upward opportunities

  Crime rates ↔️ Higher crime associated with poverty

  Social cohesion ↔️ Diminished trust and cooperation
• Progressive taxation involves higher tax rates for higher income brackets.
• What is one potential weakness of minimum wage laws?

  Reduced employment
• Income inequality is often measured using the Gini coefficient
• What assets are considered in wealth inequality?

  Real estate, stocks, savings
• The Gini coefficient is a statistical measure of income inequality within a population
• What is the Gini coefficient calculated by dividing?

  Area between Lorenz curve and equality line by total area under equality line
• Match the Gini coefficient value with its interpretation:

  0 ↔️ Perfect equality

  0.2 - 0.3 ↔️ Low inequality

  0.4 - 0.5 ↔️ Moderate inequality

  0.6 - 0.7 ↔️ High inequality

  1 ↔️ Complete inequality
• A Gini coefficient of 0.2 indicates moderate income inequality.

  False
• Steps to measure wealth inequality using the Lorenz curve:

  1️⃣ Plot cumulative percentage of population against cumulative percentage of wealth

  2️⃣ Draw the Lorenz curve below the line of perfect equality

  3️⃣ Calculate the area between the Lorenz curve and the line of perfect equality

  4️⃣ Compute the Gini coefficient using the calculated area
• What does a Gini coefficient of 1 indicate for wealth inequality?

  All wealth owned by one person
• Specialized skills increase wages and reduce wealth inequality.
• What is a positive economic implication of wealth inequality?

  Incentivizes productivity
• High income and wealth inequality can lead to disparities in health outcomes due to inadequate healthcare access