# Ch18 - Chapter 18 Economic Inequality I Measuring Economic...

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C h a p t e r 1 8 : E c o n o m i c I n e q u a l i t y I. Measuring Economic Inequality A. The census bureau defines a household’s income as money income , which equals market income plus cash payments to households by the government. Market income equals wages, interest, rent, and profit earned by the household in factor markets, before paying income taxes. 1. Figure 18.1 shows the distribution of income across the 113 million households in the United States in 2005. a) The mode income is the most common income and was about \$13,000. b) The median income is the level of income that separates the population into two groups of equal size and was \$46,326. c) The mean income is the average income and was \$63,344. 2. If income were distributed across the population with a bell-shaped distribution (much like the distribution of people’s heights), the mode, median, and mean values are all equal. a) The distribution of income in the United States is positively skewed , which means the mean value exceeds the median value, which exceeds the mode value. b) A positively skewed income distribution means that the distribution of incomes across the population has a long tail of high income values. 3. Income shares are the percent of total income held by a given portion of the population. Figure 18.2 shows the distribution of income shares for the United States in 2005. a) Usually income shares are reported in quintiles , which reports the income earned by each 20 percent of the population, from poorest to richest. b) The poorest 20 percent of the population in 2005 received 3.4 percent of the total income earned by all people in the United States. c) The middle 20 percent of the received 14.6 percent of total income, and the richest 20 percent received 50.4 percent of total income. B. The income Lorenz curve graphs the cumulative percentage of income earned against the cumulative percentage of households. Figure 18.3 shows the income Lorenz curve for the same income shares as shown in Figure 18.2. 1. The vertical axis of a Lorenz curve is the cumulative percentage of total income and the horizontal axis is the cumulative percentage of households. 2. If everyone were to have the same income, the income Lorenz curve would be a 45 ° line from the lower left corner to the upper right corner. This line is called the line of equality . a) The closer is the Lorenz curve to the line of equality, the more equal is the distribution of income. b) The farther away is the Lorenz curve from the line of equality, the less equal is the distribution of income. C. The Distribution of Wealth 1. Wealth is the value of all the things that are owned by a household at a given point in time. 2.

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## This note was uploaded on 04/03/2009 for the course ECON 2102 taught by Professor Bill during the Fall '08 term at Temple.

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Ch18 - Chapter 18 Economic Inequality I Measuring Economic...

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