Short on time? This page is the recap. For explanations, the Lorenz curve graph and worked examples, use the full study guide.
Recap
- Income = flow per period (wages, rent, interest, profit, transfers). Wealth = stock of assets minus debts. Wealth is usually more unequal than income.
- Income levels and poverty rates differ across and within groups (age, gender, race, region) and across countries.
- Lorenz curve: cumulative % of households (poorest to richest) against cumulative % of income. The 45° line is perfect equality.
- Gini coefficient: 0 = perfect equality, 1 = one household has everything. Used to compare countries, policies or time periods.
- You read Lorenz curves and compare Gini values. You do not draw Lorenz curves or calculate Gini coefficients.
Key relationships
| Relationship | How to use it |
|---|---|
| Poverty rate = people below the poverty line ÷ population × 100 | A share, not a count |
| Richest 20% share = 100% − cumulative share at 80% | Read the Lorenz curve at 80% first |
| Value of marginal product = marginal product × output price | What a factor tends to earn in competitive markets |
| Average tax rate = tax ÷ income × 100 | Rises: progressive. Constant: proportional. Falls: regressive |
| Source of inequality | One-line reason |
|---|---|
| Marginal product | More productive labour or capital earns more |
| Tax structure | Regressive taxes widen gaps; progressive taxes narrow them |
| Human capital | Education and skills raise pay |
| Social capital | Contacts and networks open jobs and deals |
| Inheritance | Wealth passes down generations |
| Discrimination | Pay below marginal product, or exclusion from jobs, schools, loans |
| Access to financial markets | Borrowing funds education, homes, businesses |
| Mobility | Moving to better-paid places or jobs |
| Bargaining power | In firms, unions and families, the stronger side gets more |
Mistakes to avoid
- Mixing up income (flow) and wealth (stock).
- Saying a Lorenz curve closer to the line of equality is more unequal. It is the other way round.
- Reading the cumulative share at 80% as the richest group’s share.
- Calling a tax progressive because the rich pay more dollars.
- Treating the Gini coefficient as a measure of average income or of poverty.
- Explaining every pay gap as discrimination, and ignoring marginal product and human capital.
Quick self-check
- A tax takes $2,000 from a $20,000 income and $5,000 from a $100,000 income. Which type is it? (Average rates 10% and 5%: regressive.)
- Country P’s Gini rises from 0.30 to 0.36. What happened to its Lorenz curve? (It moved farther from the line of equality.)
- A worker’s marginal product is 6 units per hour and the output price is $15. What does the worker tend to earn? (6 × $15 = $90 per hour.)
Next: practice questions.