Question

 1) Figure 2 below is an image of a Lorenz curve.

 a. When the Lorenz curve sags lower, does that mean the economy is more equal or more unequal?

 b.  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?

 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

Answer 2

Q1)

(a) The income distribution in the economy becomes more unequal. When the Lorenz curve sags lowers, it basically means that it is farther away from the 45-degree line that is also the line of perfect equality. Thus, the lower the Lorenz curve, the higher the inequality associated and the more unequal is the economy.

(b) The Gini coefficient from the figure can be calculated as follows:

Gini = Area between the 45-degree line and the Lorenz curve / Total Area below the 45-degree line

(i) The range of Gini coefficient is typically betwee 0 and 1

(ii) A higher coefficient, closer to 1, means the the line of perfect equality and the Lorenz curve are much farther away from each other and thus the economy is more unequal.