💸principles of economics review

key term - Lorenz Curve

Definition

The Lorenz curve is a graphical representation of the distribution of income or wealth within a population. It illustrates the degree of inequality by showing the cumulative proportion of total income or wealth held by different segments of the population, ranked from the poorest to the wealthiest.

5 Must Know Facts For Your Next Test

  1. The Lorenz curve plots the cumulative percentage of total income or wealth on the y-axis against the cumulative percentage of the population on the x-axis.
  2. A perfectly equal distribution of income or wealth would be represented by the 45-degree line, known as the line of perfect equality.
  3. The further the Lorenz curve deviates from the line of perfect equality, the greater the degree of income or wealth inequality in the population.
  4. The area between the Lorenz curve and the line of perfect equality is used to calculate the Gini coefficient, a summary measure of income or wealth inequality.
  5. The Lorenz curve can be used to compare the income or wealth distribution of different populations or to track changes in inequality over time within a single population.

Review Questions

  • Explain how the Lorenz curve is used to measure income inequality.
    • The Lorenz curve is a graphical representation of the distribution of income or wealth within a population. It plots the cumulative percentage of total income or wealth on the y-axis against the cumulative percentage of the population on the x-axis. The further the Lorenz curve deviates from the 45-degree line of perfect equality, the greater the degree of income inequality in the population. The area between the Lorenz curve and the line of perfect equality is used to calculate the Gini coefficient, a summary measure of income inequality.
  • Describe the relationship between the Lorenz curve and the Gini coefficient.
    • The Gini coefficient is a statistical measure of income or wealth inequality that is derived from the Lorenz curve. The Gini coefficient ranges from 0 (perfect equality) to 1 (perfect inequality) and represents the ratio of the area between the Lorenz curve and the line of perfect equality to the total area under the line of perfect equality. The more the Lorenz curve deviates from the line of perfect equality, the higher the Gini coefficient, indicating greater income or wealth inequality within the population.
  • Analyze how government policies can affect the shape of the Lorenz curve and the level of income inequality.
    • Government policies can have a significant impact on the distribution of income and wealth within a population, which is reflected in the shape of the Lorenz curve. Policies such as progressive taxation, social welfare programs, investments in education and job training, and regulations on minimum wages and worker protections can all contribute to a more equitable distribution of income and wealth. As these policies are implemented, the Lorenz curve would shift closer to the line of perfect equality, indicating a reduction in income inequality. Conversely, policies that favor the wealthy or reduce social safety nets could cause the Lorenz curve to move further from the line of perfect equality, signaling an increase in income inequality.