Lorenz Curve and Gini coefficient

• What are the 2 main measures of income inequality?

  Lorenz Curve and Gini Coefficient
• What does the Lorenz Curve show?

  visual representation of the income inequality that exists between households in an economy
• Why is perfect income distribution not desirable?

  would equate to socialism and completely remove incentives for work, as everyone would be paid equally
• Why is a more equal income distribution desired?

  •  reduces poverty and social unrest
  • What constitutes acceptable income equality is a normative economic issue
• What does 45 degree line of perfect equality on the Lorenz Curve represent?

  represents perfect income distribution (not desirable). The closer the curve is to the line of equality, the lower a country's Gini coefficient is.

  
• How is the Gini Coefficient determined from the Lorenz Curve?

  formula = A/A+B

  
• What are the range of values that Gini Coefficient lies on?

  0-1

  0=absolute equality

  1=perfect inequality
• What government methods can be used to shift the Gini Coefficient closer to 0?

  progressive taxation and transfer payments
• Why are the principles of capitalism important in free market economics?

  •  incentive to acquire income raises productivity and output
• What is inevitable under capitalism?

  inequality

  • Workers with higher skills receive higher wages
  • Workers with little to no skills receive little to no wage
  • Individuals with higher income will acquire more assets, leading to higher levels of income
  • In turn, they can keep on acquiring assets
  • Individuals with lower income will find it hard to acquire assets
• What is a diasdvantage of long term capitalism?

  factors of production become concentrated in ownership, with relatively few individuals developing extreme wealth, at the expense of many who lose out

  • This increases income and wealth inequality
• What are the costs unequal distribution of income and wealth?

  disincentive to work due to a sense of unfairness, causing a decline in economic growth and increase in unemployment payments and welfare benefits

  reduction in living standards as inequality gap grows as poorer households access less education and healthcare

  poor social stability - strife and political instability