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D.B (Econ) U-1, 2 T DV (C)

This document discusses measures of economic inequality, including the Lorenz curve and Gini coefficient. The Lorenz curve plots the cumulative percentages of the population against the cumulative percentages of income they receive, showing how income is distributed. The closer the curve is to the 45-degree line of perfect equality, the more equal the income distribution. The Gini coefficient is a number between 0-1 that quantifies the area between the Lorenz curve and the 45-degree line, with higher numbers indicating more unequal distributions. The document also discusses functional income distribution, which looks at the shares of total national income received by different factors of production like labor, land, capital and profits.

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Satakshi Nandy
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32 views2 pages

D.B (Econ) U-1, 2 T DV (C)

This document discusses measures of economic inequality, including the Lorenz curve and Gini coefficient. The Lorenz curve plots the cumulative percentages of the population against the cumulative percentages of income they receive, showing how income is distributed. The closer the curve is to the 45-degree line of perfect equality, the more equal the income distribution. The Gini coefficient is a number between 0-1 that quantifies the area between the Lorenz curve and the 45-degree line, with higher numbers indicating more unequal distributions. The document also discusses functional income distribution, which looks at the shares of total national income received by different factors of production like labor, land, capital and profits.

Uploaded by

Satakshi Nandy
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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124

Econonic Development in the Tbird World

income. Point B shows that the bottom 20 percent is receiving 5


percent of the total income-and so on for cach of the other eight
cumulative decile groups. Note that at the halfway point, E, 50 per
cent of the population is in fact receiving only 19.8 percent of the
total income.
The more the Lorenz line curves away from thediagonal (perfect
equality), the greater the degree of inequality represented. The ex
treme case of perfect inequality (i.e., a situation in which one person
receives all of the national income while everybody else receives
nothing) would be represented by the coexistence of the Lorenz
curve with the bottom horizontal and the right-hand vertical axes.
Since no country exhibits either perfect equality or perfect in
equality in its distribution of income, the Lorenz curves for different
countries will lie somewhere to the right of the diagonal in Figure
5.2. The greater the degree of inequality, the more "bend" and the
closer to the bottom horizontal axis will be the Lorenz curve. Two
such representative distributions are shown in Figure 5.3, one for a
relatively equal distribution (5.3a) and the other for a more unequal
distribution (5.3b ). (Can you explain why the Lorenz curve could
not lie above or to the left of the diagonal at any point? )
GiniCoeficients Afinal and very convenient shorthand summary measure of the rela
and Aggregate tive degree of income inequality in a country can be obtained by
Measures of calculating the ratio of the "area" between the diagonal and the
Inequality Lorenz curve compared with the total area of the half-square in
which the curve lies. In Figure 5.4 this is the ratio of the shaded area
Ato the total area of the triangle BCD. This ratio is known as the
"Gini Concentration Ratio," or more simply, the Gini coeficient,
named after the Italian statistician C. Gini who first formulated it in
1912.
Gini coeficients are aggregate inequality measures and can vary
anywhere from zero (perfect equality) to one (perfect inequality). In

100 100

income
ofPercent income
of
Percent

Line of equality Line of equality

Lorenz Curve Lorenz curve

Flgure 5.3
The greater the
Curvature of the Lorenz
Percent of population 100
line, the greater the Percent of population 100
relative degree of
inequality (a) A relatively equal distribution (b)A relatively unequal distribution
Growtb, Poverty, and Income Distribution 125

D
Percent of
inconme

GINIcoefficient
Shadedarea A
Total area BCD

Lorenz Curve
B Flgure 5.4
Percent of population Estimating the GINI
coefficient

actual fact, as we shall soon discover, the Gini


coefficient for coun
tries with highly unequal income distributions typically lies
0.50 and 0.70, while for countries with relatively equitable between
tions, it is of the order of 0.20 to 0.35. The coefficient distribu
for our
hypothetical distribution of Table 5.3 and Figure 5.2 is approxi
mately 0.61-a relatively unequal distribution.
The second common measure of income distribution used by Functional
economists, the functional or factor sbare distribution, attempts to Distributions
explain the share of total national income that each f¡ctor of produc
tion receives. Instead of looking at individuals as separate entities,
the theory and measure of functional income distribution inquires
into the percentage that "labor" receives as a whole and compares
this with thepercentages of total income distributed in the form of
rent, interest, and profit (i.e., the returns to land and financial and
physical capital). Although specificindividuals may receive income
from all these sources, it is not a matter of concern for the functional
approach.
A sizable body of theoretical literature has been built up around
the concept of functional income distribution. It attempts to explain
the income of afactor of production by the contribution that this
factor makes to production. Supply and demand curves are assumed
to determine the unit prices of each productive factor. When these
unitprices are multiplied by quantities employed onthe assumption
of efficient (i.e., minimum cost) factor utilization, one gets a measure
of the total payment to each factor. For example, the supply of and
demandfor labor are assumed to determine its market wage. When
this wage is then multiplied by the total level of employment, one
gets a measure of total wage payments, also sometimes called the
total wage bill.
Figure 5.5 provides a simple diagrammatic illustration of the tra

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