2.7 Income distribution and welfare

DEFINITIONS:

1. Income: The flow of money received by individuals or households over a period of time, typically from employment, investments, or government benefits.
2. Absolute Poverty: A condition where individuals lack the financial resources to meet basic needs such as food, clothing, and shelter, typically defined by a set income threshold.
3. Relative Poverty: A condition where individuals' income is significantly lower than the average income in society, causing them to experience a lower standard of living.
4. Wealth: The total value of all assets owned by an individual or household, including property, investments, and savings, minus any liabilities.

Explain:

2.7.1 Income and wealth; distribution and inequality

Income and wealth are key economic indicators that reflect the financial resources of individuals or households. Income refers to the money earned from work, investments, or other sources over a period, typically annually. Wealth, on the other hand, encompasses the total assets owned by an individual or household, including property, savings, and investments, minus any debts.

Distribution refers to how income or wealth is divided among individuals or households in a society. It can be measured by looking at the percentage of total income or wealth held by different segments of the population.

Inequality refers to the unequal distribution of income or wealth among individuals or households in a society. It indicates disparities in financial resources, with some individuals or groups having significantly more income or wealth than others. Economic inequality can be measured using tools like the Gini coefficient, which quantifies the extent of inequality within a given population.

Understanding these concepts helps economists and policymakers analyze and address issues related to fairness, social justice, and economic stability within a society.

2.7.2 The policy objective of a more even distribution of income

The policy objective of a more even distribution of income aims to reduce income inequality within a society. This goal is pursued through various economic policies that seek to ensure a fairer distribution of wealth and income among different segments of the population. Policies might include progressive taxation, targeted welfare programs, minimum wage regulations, and education and training initiatives aimed at enhancing opportunities for lower-income groups. Achieving a more even distribution of income is often seen as promoting social cohesion and reducing poverty levels.

2.7.3 Absolute and relative poverty

Absolute poverty refers to a condition where individuals lack the basic necessities required to meet their fundamental needs, such as food, shelter, and clothing. It is often defined by a specific income threshold below which individuals cannot afford these essentials.

Relative poverty, on the other hand, measures poverty in relation to the economic status of other members of society. It is defined as having significantly lower income or resources compared to the average or median income of the society in which one lives.

2.7.4 Inequality data; Gini coefficients and relevant quantiles

These quantiles help in understanding the extent of inequality by comparing the income or wealth distribution across different segments of the population. For instance, a larger share of income or wealth held by the top quintile or decile indicates higher inequality.

Explain with the aid of a diagram

2.7.5 Explanation of the Distribution of Income (Lorenz Curve)

The Lorenz curve is a graphical representation of the distribution of income or wealth within a society. It illustrates the degree of inequality in income distribution. The further the Lorenz curve is from the line of equality, the greater the level of inequality.

Diagram:

Below is a simplified diagram of the Lorenz curve:

Cumulative Percentage of Households (X-axis): This axis shows the cumulative percentage of households, starting from the poorest to the richest.

Cumulative Percentage of Income (Y-axis): This axis shows the cumulative percentage of income received by these households.

1. Line of Equality (45-degree line): This line represents perfect equality, where each percentage of households earns the corresponding percentage of total income (e.g., 20% of households earn 20% of the income).
2. Lorenz Curve: This curve shows the actual distribution of income. The further it bends away from the line of equality, the more unequal the distribution of income.
3. Gini Coefficient: The Gini coefficient, derived from the Lorenz curve, quantifies income inequality. It ranges from 0 (perfect equality) to 1 (perfect inequality). It is calculated as the ratio of the area between the Lorenz curve and the line of equality to the total area under the line of equality.

Explanation:

Interpretation: