Income inequality

Dr.Naheed Sultana

• The unequal distribution of household or individual income across the various participants in an economy. Income inequality is often presented as the percentage of income to a percentage of population. For example, a statistic may indicate that 70% of a country's income is controlled by 20% of that country's residents

Lorenz curve

• economics, the Lorenz curve is a graphical representation of the cumulative distribution function of the empirical probability distribution of wealth. It is often used to represent income distribution, where it shows for the bottom x% of households, what percentage y% of the total income they have

Lorenz curve

• Percent Distribution of Aggregate Household Income in 1978, by Fifths of Households

• Households Percent of Income• Lowest Fifth

(under $6391) 4.3• Second Fifth

($6392 - $11955) 10.3• Third Fifth

($11956 - $18122) 16.9• Fourth Fifth

($18122 - $26334) 24.7• Top Fifth

($26335 and over) 43.9

How to build Lorenz Curves

• Individual Income• 1 2,417• 2 7,800• 3 8,489• 4 10,072• 5 12,957

• In this income distribution, individual 1 owns US$2,417/year (he/she is the poorest),

• while individual 5 owns US$12,957/year (he/she is the richest). below, we

• illustrate the process to build the Lorenz Curve

Example 2

Gini coefficient

• In Figure 1, as OP is the equi distribution line, ORP is the area defined by the Lorenz Curve of the standard income distribution and the equi distribution line, called the concentration area. OPQ is the area of maximum concentration, i.e the area between the Lorenz Curve of income distribution C and theequidistribution ine.

• G = concentration area/ maximum concentration are

G = ORP/OPQ

Coefficient of Variation (CV)

• A measure of dispersion common in statistics, the CV, is simply the sample SD divided by the sample mean

Functional distribution• The functional or factor share distribution of

income, attempts to explain the share of total national income that each of factor of production receives .The theory of functional income distribution represents the percentage that labor receives as a whole and compares with the percentages of total income distributed in the form of rent, interest and profit .

Functional income distribution

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WAGES

PROFITSWage Rate

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Measuring Absolute Poverty

• A population or sections of population living below a specific minimum level of real income measures the magnitude of absolute poverty.

• Absolute poverty is measured using• Headcount(H)• Headcount Index (H/N)• Poverty Gap (total income shortfall)

The headcount index

• The headcount index is the proportion of the population for whom consumption is less than the poverty line.

The headcount index

The headcount index

Advantages and disadvantages of HCI

• Advantages:• simple to construct • easy to understand. • Disadvantages:• It ignores differences in well-being between

different poor persons• the index does not change if income inequality

increases or decreases

Poverty gap “PG”• The poverty gap is the average, of

the gaps between poor people’s living standards and the poverty line. It indicates the average extent to which individuals fall below the poverty line. The poverty gap index expresses the poverty gap as a percentage of the poverty line

Poverty gap “PG”

Poverty gap (PG) and PG index

• The poverty gap index (PGI) is defined as the ratio of the Poverty Gap (PG) to the poverty line. It is the poverty gap expressed as a percentage of the line

PGI

• The PG or the PGI can be interpreted as the average shortfall of poor people. They show how much would have to be transferred to the poor to bring their expenditure up to the poverty line

Foster-Greer-Thorbecke Index

• It is generalized measure of poverty within an • economy. It combines information on the

extent of poverty (as measured by the • Headcount ratio), the intensity of poverty (as

measured by the Total Poverty Gap) and • inequality among the poor (as measured by • the Gini and the coefficient of variation for the

poor).

• Where z is poverty line, N is the number of people in an economy, H is the number of poor ,those with incomes at or below z, Yi are individual incomes and α is a "sensitivity" parameter. The higher the FGT statistic, the more poverty there is in an economy.

Economic Characteristics of Poverty Groups

• Rural poverty• Women and poverty• Ethnic minorities and poverty