Distribution of Income

• The income gap refers to the amount of income inequality in the nation
• Several factors contribute to differences in income
  • Different economic and social backgrounds or difficulties
  • Different skills and talents
  • Different education
• In a market economy, an individual's income is based largely on the value of the goods and services that person has to offer
• People with resources and talents that are in high demand will earn more money than people whose resources and talents are not in such high demand

• Example - if the richest 20% of families earn 49% of the total income, and the poorest 20% of families earn 5% of the total income, there is a high level of income inequality
• The two ways to measure the amount of inequality in the distribution of income are the Lorenz Curve and the Gini Index

• Illustrates the amount that a nation's distribution of income varies from a perfectly proportional distribution of income
• To create a Lorenz Curve, economists plot the proportion of the total income that various percentages of the population received

• The more a Lorenz Curve dips below the 45-degree Equality Line, the greater the amount of income inequality

• Another statistical measure of income inequality
• It ranges from 0.0, where each family household receives an equal share of the total income, to 1.0, where one family or household receives all of the income

• Measures of income distribution tend to overemphasize income inequality for two reasons
  • The data used to determine distribution of income are based on families' gross incomes before deductions, such as personal income taxes, Social Security, Medicare, health insurance, and union dues
  • Income does not include capital gains or the value of noncash benefits that families or households may receive, such as food stamps, health benefits, or low-cost housing
  • Most measures of income distribution do not differentiate among families or households of different sizes or ages or with different numbers of wage earmers - people usually earn different amounts of income at different stages of their lives, and families of different sizes and ages need different amounts of income

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