Economic Inequality Notes

Economic Challenges and Responses: Economic Models & Data to Measure Social Needs

Geographic, social, political, and demographic factors contribute to economic inequality in Canada.
There are diverse viewpoints regarding the causes and impact of economic inequality and how to best address it.

Students will analyze causes and measures of, as well as responses to, economic inequality in Canada (Focus on: Stability and Variability; Economic Perspective).

Students will explain how economic models and data are used to measure social need in Canada and to help frame responses to social issues and describe challenges associated with the use of these models and data.

I can define Lorenz Curve, wealth, Gini coefficient.
I can illustrate the Lorenz Curve and explain what it depicts.
I can explain the relationship between the Gini coefficient & the Lorenz Curve.
I can explain how the Lorenz Curve and Gini coefficient are used to form economic policies.
I can describe the challenges with the Gini coefficient.

The income Lorenz curve graphs the cumulative percentage of income earned against the cumulative percentage of households.

The vertical axis of a Lorenz curve is the cumulative percentage of total income.
The horizontal axis is the cumulative percentage of households.

If everyone has the same income, the income Lorenz curve is a 45-degree line from the lower-left corner to the upper-right corner.
This line is called the line of equality.
The Lorenz curve shows the cumulative distribution of income.

The Lorenz Curve can be used to compare income distribution before and after government intervention (taxes and transfers).

A household’s wealth is the value of all the things that it owns at a point in time.
The distribution of wealth is another way of examining the degree of economic inequality.

The Gini Coefficient is a measurement of the degree of inequality in the income distribution.
The Gini Coefficient is equal to the Area between the line of perfect income equality and the actual Lorenz Curve, divided by the Entire Triangular area under the line of perfect income equality.
A Gini Coefficient of 0 is complete income equality, while a Gini Coefficient of 1 means complete income inequality.

To measure inequality as an index number, we use the Gini ratio, which equals the ratio of the area between the line of equality and the Lorenz curve to the total area under the line of equality.
Gini\ Ratio = \frac{Area \ between \ Lorenz\ Curve \ and \ Equality\ Line}{Total \ Area \ under \ Equality \ Line}

With perfect equality, the Lorenz curve is the line of equality, and the Gini ratio is zero.

With the most extreme inequality—one person has all the income—the Lorenz curve runs along the axes, and the Gini ratio is one.

The closer the Gini ratio is to one, the more unequal is the distribution of income.

The Gini Coefficient is displayed over the years from 1994-2014. The Gini Coefficient ranges from approximately 0.270 to 0.320 during this time period.

By itself, the Gini coefficient cannot tell us anything about the income share of a particular quintile.
Although there is a tendency to believe that the larger percentage of total income the lower the Gini coefficient, this need not be the case.
The Gini coefficient for Lorenz curve 2 can be lower than the Gini coefficient for Lorenz curve 1, but the bottom 20% of households obtains a smaller percentage of total income in the lower Gini Coefficient case.