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? 100 Perfect Equality Line Percentage of Income Lorenz Curve Percentage of Population 100 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

a Lorenz curve amarul Percentage of Perfect Equality Line A -B. Percentage of population

a) The closer the Lorenz curve is to the lesser is perfect equality line the inequality Thus when the Lorenz curve sags lower It means the economy is more unequal b) Gini coefficient Area represented by A Area represented by (A+B) 1 Typical range of Gini coefficient is from to

is co-incident with line. There is perfect When lorenz curve perfect equality equality in the i.e. Area Ginie coefficient economy A=0 O o О+В curve when lorenz is of maximum possible distance from perfect equality line . There is perfect inequality in the economy B. 17 А A Area Gini coefficient Ato Thus the typical range of Gini coefficient ii) Typicall y Gini coefficient lies with a higher member indicating greater inequally the economy to the between O and