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    PPT - Income Distribution

    The concepts of income and wealth

    • Stock vs flow
      • Stock: a quantity measured at a fixed period of time, e.g. GDP, inventories
      • Flow: a quantity which is measured with reference to a period of time e.g. income, depreciation
    • Income
      • The receipt of spending power by persons. Such income may be productive or non-productive (flow of wealth)
        • Non-Productive Income - also known as transfer income is received from the government by persons as cash social service benefits such as pensions
        • Productive Income - also known as factor income, a reward to the factors of production
      • Types
        • Private Income: income earnt as an employee/self-employed person
        • Gross Income: private income plus government transfer payments
        • Disposable Income: gross income less tax
        • Final Income: Disposable income and any indirect government benefits
          • an example of a benefit can be infrastructure, education, healthcare
    • Wealth
      • Is a stock variable (stock of assets)
      • Refers to the stock of assets held - land, houses, shares, government securities, consumer durables such as cars, money
        • LESS the liabilities including mortgage, bank loans and amounts owing on credit cards
      • May be acquired from inheritance, saving, income or luck

    The measurement of the income and wealth distribution, i.e. the Lorenz curve, Gini Coefficient

    • Poverty:
      • Absolute poverty: a situation where people live below a subsistence level of income
      • Relative poverty: a situation where people do not achieve what our society defines as a minimum standard of living
    • Income Inequality
      • a measure of the unevenness in income distribution within a population
      • Can be illustrated using the lorenz curve and represented using the gini coefficient

    Lorenz Curve

    • Population is ranked according to their income, from the lowest to highest income
    • A model showing cumulative proportion of the population, ranked by income, against their cumulative share of income
    • Is called the line of equality

    LorenzCurve.svg

    Gini Coefficient

    • Measures the degree of income inequality in a country
      • between $0$ and $1$ where $1$ is absolute inequality and $0$ is income equality
      • measured as (area between diagonal and lorenz curve)/(entire area under the diagonal)

    Explanation of Inequality

    • Personal traits e.g. personalities and talents
    • Occupational conditions e.g. training, education and responsibilities
    • Opportunities
    • Other factors e.g. sickness, disabilities, age and LUCK

    Strategies for income distribution

    • Direct taxation - personal tax is progressive, the use of brackets and whatnot
    • Transfer payments - cash support for different groups
    • Indirect government payments - social transfers increase access to basic services which may be under consumed if provided by the market