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MEASURING INEQUALITY.
We measure the distribution of income and wealth by using concepts such as the Lorenz Curve and the Gini Coefficient.
The Lorenz Curve
The Lorenz curve attempts to show the extent of the inequality of income in an economy.
As no economy has ever sustained a system of an equaldistribution of income, the aim is to achieve equity in the distribution of income.
One measure of equity in income distribution is to achieve a situation where there are no extremes of wealth and poverty in the economy. The wealthy are moderately wealthy and do not exert undue power over the economy, while the poor have enough income to live above the level of poverty and are able to enjoy the basic rights of access to education, health and opportunity.
The Lorenz curve shows on the vertical axis the percentage of national income, and on the other the percentage of households. The closer the Lorenz curve is to the line of complete equality, the more equal society is. Government use a number of tools, such as a progressive taxation system and redistribution tools such as working for families,, to try and make society more equal.
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The Lorenz curve concentrates on disposable income - money left for spending after the payment of taxes. The more the Lorenz Curve slopes away from the line of complete equality the more unequal a society is.
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A decrease in inequality can be shown on the Lorenz curve by the line of income distribution moving closer to the line of complete equality.
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The Lorenz Curve for NZ shown below, shows the impact of taxes and income ditribution tools (such as working for families) on the ditribution of income in New Zealand.
Source: www.treasury.govt.nz/publications/research-policy/wp/2008/08-04/08.htm |
Limitations of the Lorenz Curve
- Lorenz Curve of income distribution does not measure wealth effects. Some people may be “income poor” yet “asset rich”
- Income measurement does not take into account lifecycle stages. A student may be poor due to the early of their career.
- Income measurement does not measure non-market activity which can make a difference to a households standard of living.
