Download Income Distribution

Income Distribution
How free markets create & divide wealth
Top 1% pay more taxes 20% => 40%
The bottom 90% pay less 50% => 33%
BUT, the inequality gap rises!
Distribution of Income
• Egalitarian Society– means a equal society
– Free markets focus on efficiency not equality
• Free markets produce tremendous wealth but also a large gap
between rich & poor
– Inequality today is the highest since the 1920’s
– Globalization & Technology have exacerbated this trend
Where do YOU want to live?
Country A
Country B
GDP per capita = $20,000 per year
GDP per capita = $60,000 per year
Which country do YOU want to live in?
Population = 100,000
Population = 100,000
Each person earns $20,000
GDP = 2 billion or $20,000 per capita
400 people earn $15 million
99,600 earn $1,000 per year
GDP = 6 billion or $60,000 per capita
Measuring Income Inequality
• How do you best measure income inequality?
– Average income
– Median income
Both flawed measures of income gap
• Lorenz curve precisely measures income inequality.
– Straight line represents “perfect” income equality
Lorenz Curve A
Line of Perfect equality
Lorenz Curve B
Lorenz Curve
Lorenz Curve A
Line of Perfect equality
Lorenz Curve B
Gini Index Summary
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•
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Measures the distance from line of “perfect equality” to Lorenz Curve
Gini Index ranges from Zero to 1
An index of 0 (zero) means perfect EQUALITY
– on the line => 40% population has 40% of income
•
As the Gini Index moves from 0  1 inequality increases
Lorenz Curve A
Line of Perfect equality
Lorenz Curve B
Lorenz Curve Review
France: .34
Line of Income
equality
Gini Coefficient
0-1
USA: .46
Gini Index by Country
Sweden = .23
USA = .46
England = .36 Germany = .28
France = .32
Brazil = .59
South Africa = .58
Japan = .25
Practice Test
Wealth vs. Income
• Top 1% has 21% of Income
• Top 1% has 40% of Wealth
Bottom 40% has less than 1% of wealth
Gini Coefficient of WEALTH = .82
Winner Take All Society?
Top 1% versus Top 0.1%
• Top 1%:
– Income: Over $350,000 per year
– 1.5 million households
• Top 0.1%:
– Income: $1.4 million per year
– Only 146,000 households
The Rich get Richer