Question

Problem 4 Economic Inequality (20 points) 1) Figure 2 below is an image of a Lorenz curve. a. (4) When the Lorenz curve sags lower, does that mean the economy is more equal or more unequal? b. (6) Explain how to use the information in Figure 2 to calculate the Gini coefficient. i. What is the typical range for Gini coefficients? ii. What does a high number indicate? Figure 2 2) (10) Describe the inequality in income and wealth between countries, and explain whether each has grown or shrank over the past 50 years. Why is wealth inequality greater than income inequality?

Answer 1

Q1)

(a) yes, if the Loren curve sags downwards, it does mean that the income distribution is more unequal. the lower the Lorenz curve, the more is the distance between the line of perfect equality and the Lorenz curve, and the more unequal it the distribution with the top shares of the population earning a larger portion of total income.

(b) The Gini coefficient can be calculated by using the following formula on a graph:

Gini coefficient = (Area between the Line of perfect equality and the Lorenz Curve)/(Total Area below the Line of perfect equality)

(c) (i) The typical range of Gini coefficients is 0 to 1

(ii) A higher number indeicates a more uneven distribution of income