MEASURING INCOME INEQUALITIES Featuring the Lorenz Curve, the
Gini Coefficient and more
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MEASURING INCOME INEQUALITIES Economists use quintiles to
measure the amount of income earned by different segments of the
population. In a fantasy world of perfect equality, each quintile
would equally share a % of the countrys total income.
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THIS IS NO FANTASY WORLD As you know, our world is far, far
away from an income equality fantasy world. When examining
quintiles, we can say that in general, the less income received by
the lowest quintile, or the more income received by the highest
quintile, the greater the inequality of income
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THE LORENZ CURVE
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The Lorenz curve plots the actual relationship between
percentages of the population and the shares of income they
receive. The closer the Lorenz curve is to the 45 degree line of
perfect income equality, the more equitable the distribution of
income is in a country
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BAD LORENZ CURVE!
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SHAME ON BRAZIL Brazil serves as an excellent example of a
country with a frighteningly unequal distribution of income. In
Brazil a tiny percentage of people receive a very large amount of
the income, while millions live in slums and suffer through
life.
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BETTER LORENZ CURVE
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HOORAY FOR SWEDEN! Sweden presents an example of a country with
a more equal distribution of income. While we can certainly see
that the wealthy have a higher percentage of income than the lower
class, Sweden does a better job of creating a society where income
is more evenly spread out
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IN GENERAL.. The closer a countrys Lorenz curve is to the 45
degree line of perfect income equality, the less discrepancy exists
between the haves and the have- nots
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THE GINI COEFFICIENT The Gini Coefficient is a summary measure
of the information contained in the Lorenz curve. It is defined as:
Area b/w 45 degree line and Lorenz Curve / Entire area under 45
degree line
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VALUES OF THE GINI COEFFICIENT Perfect income equality = 0. The
larger the Gini coefficient, and the closer it is to 1, the more
inefficient is the distribution of income. So a country with a
Lorenz curve close to the 45 degree line would have a lower Gini
coefficient, and a value closer to 0
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GINI EXAMPLES Brazil =.6 Denmark =.25
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REDISTRIBUTING INCOME Countries aiming to redistribute income
from the wealthy to the poor will see their Lorenz curve shift
closer to the 45 degree line. This will result in a smaller value
for their Gini coefficient and create a more equal society.
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SOME CONCLUSIONS Based on some relatively recent data, highly
unequal income distribution (above.45) is seen only among lesser
developed countries. The MDCs with the highest Gini numbers, thus
the most unequal are New Zealand (.44) and the U.S.A. (.41)
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SOME CONCLUSIONS Considering LDCs, Gini coefficients above.45
are not at all uncommon, suggesting that in many poor countries you
have a small upper class with lots of money, and a very large lower
class with very little money
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THE LAFFER CURVE Or should that be spelled Laugher Curve?
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LAFFER CURVE Introduced by an American economist (the story is
he wrote it on a bar napkin in 2 minutes) in 1974, Laffers curve
argues for the idea that higher taxes are a disincentive to
work.
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LAFFER CURVE Laffer reasoned that lower taxes would create
incentives for people to work harder, work longer, take risks, and
invest more. All this magic would shift LRAS to the right, create
economic growth, and actually result in more taxes collected!
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LAFFER CURVE
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So Laffers curve argues that tax collected will be 0 at rates
of 0% and 100%. When tax rates are low, tax revenue will begin to
rise as the tax rate increases. Eventually, a tax rate is reached
after which tax revenues will decline if the tax rate increases any
further.
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REAGAN AND LAFFER
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Reagan thought Laffers curve was a work of genius and
immediately cut taxes, especially on the wealthy. Unfortunately,
tax revenues did not increase, and the U.S. deficit ballooned. But
people continue to believe..
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HATING ON THE LAFFER CURVE Tax cuts dont incentivize people to
work more! Tax cuts have a greater demand-side effect than
supply-side effect. Inflation may result, interest rates may rise,
leading to less aggregate demand and lower tax revenues for
sure
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HATING ON THE LAFFER CURVE Laffers curve is far from
scientific. Its nearly impossible to identify what the ideal tax
rate would be. I n addition, this rate could be variable over time,
and certainly would vary among countries. Many economists dismiss
the Laffer curve as an oversimplification
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HATING ON THE LAFFER CURVE Laffers argument may apply to the
very wealthy at high tax rates, but isnt valid for most people at
lower tax rates The legacy of the Reagan administration provides
enough evidence to reject the Laffer curve and wonder why it
appears in an Economics textbook!