questions

• Lorenz Curve


  Expresses the relationship between the cumulative percentage of households and the cumulative percentage of income. It shows the income distribution in an economy.
• Meaning of the Lorenz curve

  1. Households in an economy are ranked according to their incomes in ascending order

  2. Cumulative percentage of households is plotted on the x-axis

  3. Cumulative percentage of income is plotted on the y-axis

  4. Every point on a Lorenz curve can be interpreted as 'the bottom X% of households earn Y% of the total income'
• Perfect income equality


  • The Lorenz curve is a 45-degree straight line from the origin
• Perfect income inequality


  • The horizontal segment represents the cumulative income of the 9,999 households with the lowest income being zero
  • The vertical segment represents when the 10,000th household is included, the cumulative percentage of income jumps to 100%
• Income distribution


  • When the income of an economy is distributed more evenly, the Lorenz curve will be closer to the line of perfect income equality
  • When the income of an economy is distributed more unevenly, it will be closer to the line of perfect income inequality
• Gini coefficient


  • An indicator of the degree of income inequality, equal to the area between the line of perfect income equality and the Lorenz curve divided by the entire triangular area under the line of perfect income equality
  • Its value ranges between zero and one
  • The higher the value, the higher the degree of income inequality
• A decrease in the Gini coefficient of an economy means its income distribution becomes more even
• If the Gini coefficients of two economies are the same, their Lorenz curves must be identical
• The higher the Gini coefficient of an economy, the closer its Lorenz curve to the line of perfect income inequality
• Taxation and social transfers in Hong Kong could reduce income inequality
• High-income households tend to pay more taxes than low-income households, so income after tax is more evenly distributed
• Social benefits are usually provided to the low-income group instead of the high-income group, so post-tax post-social transfer household income is more evenly distributed
• The Gini coefficient based on original household income in Hong Kong increased from 0.537 to 0.539 between 2011 and 2016, showing the income distribution became more uneven
• The median income of the lowest decile group in Hong Kong increased from $2,070 to $2,560 between 2011 and 2016
• Gini coefficient cannot show the change in real income caused by a change in the general price level
• The Gini coefficient for the United States is similar to that for Turkey but the per capita GNI of the United States is much higher
• Different places may use different types of income data in calculating the Gini coefficient and may define income in different ways
• When analysing the income inequality of different places, one should take into account population structures and family structures before drawing any conclusion
• Lorenz curve of Country A in 20X6

  Lies closer to the line of perfect income equality than that in 20X1, implying the Gini coefficient in 20X6 is smaller
• The Gini coefficient ignores changes in income over a person's lifespan
• Increases in the proportions of young and old members of an economy will generally increase the Gini coefficient, making the income distribution appear more uneven
• Government measures to redistribute income, such as taxes and social welfare, will lower income inequality, but income inequality measurements may not fully reflect their effects
• Household income usually increases with household size because there tend to be more workers in a larger household
• If the variation in household sizes is great, measurements based on household income may indicate high income inequality even if individual income inequality is low
• If some sources of income are excluded in the measurements, the accuracy of income inequality measurement will be affected
• Factors affecting household income


  • Income from providing human effort (wage income)
  • Income from holding assets (capital income)
  • Government
• Measurements based on household income may indicate high income inequality even if individual income inequality is low
• Income


  Different definitions of income, including income from full-time employment, part-time jobs, rent, interest and dividends
• Gini coefficient


  • Ignores the change in income over a person's lifespan
• Lorenz curve


  • Ignores the difference in household sizes
• Factors affecting household income


  • Income from providing human effort (wage income)
  • Income from holding assets (capital income)
  • Government taxes and transfers
• Wage income


  Income from providing human effort, e.g. wages and salaries
• Unequal ownership of capital is an important source of income inequality
• Return on capital is an important source of income
• People holding more assets tend to earn more income, so income inequality can be driven by unequal ownership of assets
• Progressive taxes


  Taxes where the proportion of income as tax payment increases with the amount of income
• Regressive taxes


  Taxes where the proportion of income as tax payment decreases with the amount of income
• If a government imposes progressive taxes, the degree of income inequality tends to decrease
• If a government imposes regressive taxes, the degree of income inequality will tend to increase
• Transfers


  Payments to people that are not made in return for goods or services, can be in cash or in kind