Income inequality

Key terms:

Wealth - the available assets that a person owns which may include property, stocks and
shares, personal savings or easily tradable valuable items such as gold or Jewellery.

Income - the amount that an individual receives from income (if they have a job) from
rent on land or property, interest on their savings in the bank or profit on stocks and shares
that they may earn. These monies when added together collectively make up the
individual’s income or gross income.

Net income - a person's gross income minus taxes paid.

Equality - fairness in terms of providing each member of society with the same
opportunities to be successful - access to healthcare, education and training e.t.c.

Equity - means that everyone in a society would receive the same level of income,
regardless of how hard they worked to get it.

Relative poverty - the condition in which people lack the minimum amount of income
needed in order to maintain the average standard of living in the society in which they
live. A person is described as relatively poor if they ear less than 50% of the mean wage
in the country.

Lorenz curve - developed by Max Lorenz in 1905 and illustrates the level of income
inequality within an economy.

Gini coefficient - a formulae developed by Corrado Gini in 1912, it measures the level of
income inequality within a society, but in numerical form. Nations given a Gini
coefficient of between 0 and 1, with 1 being the most unequal and 0 representing a nation
where ever citizen earned the same.

Universal basic income - a governmental public program for a periodic payment

delivered to all on an individual basis without means test or work requirement. The
income provided would be unconditional, automatic, non-withdrawable, paid on an
individual basis and delivered as a right.

Positive discrimination - the act of favouring someone based on a "protected

characteristic". This could be: Hiring someone with a disability in order to fulfill a quota.

© Mark Johnson,
InThinking www.thinkib.net/Economics 1
Activity 1: Wealth and income

Are wealth and income connected meaning is it the case that a person with a high disposable
income will also be wealthy? Do wealthy people generally have high incomes?

Activity 2: Income inequality

(a) The following chart which

illustrates the changes to all income
groups in the USA since
1980. Describe what has happened to
the incomes of the different wage
earners in the country and describe the
impact that this had on the level of
income inequality in the economy?

(b) Watch the following short youtube video, which features an interview with former
president Barack Obama and then summarise why he believes that inequality grew in this
period, including when he was President.

© Mark Johnson,
InThinking www.thinkib.net/Economics 2
(c) Describe the social and economic costs associated with increased inequality?

(d) So in conclusion, does income inequality matter providing that everyone is getting a little
richer?

(e) Why did Andy Green describe taxation as the price we pay for a civilised society?

© Mark Johnson,
InThinking www.thinkib.net/Economics 3
Activity 3: Link to TOK (equity v equality of opportunity)

1. How far should the state go in correcting for social advantage, for example, should
governments devote more resources to schools in poorer neighbourhoods than wealthier
ones?

2. Should the state attempt to correct for the uneven distribution of natural abilities such as IQ
by devoting proportionally more resources to children of less than average IQ?

3. What is meant by a fair distribution of income.

© Mark Johnson,
InThinking www.thinkib.net/Economics 4
Activity 4: Measuring inequality using the Lorenz curve

The diagram to the right illustrates the Lorenz

curve for two nations, Germany and USA.

(a) According to the diagram which of the two

nations has the greater level of inequality?

(b) Why does the blue line represent the line of

perfect equity.

(c) Does any nation have perfect equity?

(d) How are nations with smaller income inequalities represented on a Lorenz curve?

Note about drawing the Lorenz curve

The Lorenz curve is a difficult concept for some IB students to understand and is best learnt
through practise. A difficult area is in labelling the diagram accurately. As an examiner I
will sometimes see Lorenz curves diagrams with the axis drawn around the wrong
way. Students are also advised to include either numbers on their diagram to illustrate the
examples on the diagram.

© Mark Johnson,
InThinking www.thinkib.net/Economics 5
Activity 5: Gini coefficient

The Gini coefficient measures inequality in a numerical form and is calculated by the
formulae A / (A+B). Each nation is ranked on the
Gini scale from 0 to 1.

Examples of Gini coefficients

If the richest 1% of the population owned 50% of

the nation's wealth / income this would mean a
Gini coefficient of 50%.

Other Gini coefficients

African continent 0.52 - 0.7

Mid ranking nations 0.3 - 0.4

Lowest Gini coeffcients were in Europa and ranged from 0.25 - 0.36.

(a) Explain possible reasons for different levels of income inequality between nations?

(b) Why might a household be living in poverty as a result of low income levels?

© Mark Johnson,
InThinking www.thinkib.net/Economics 6
Activity 6: Patterns of equality throughout the world

The map below shows the pattern of inequality around the world. What patterns emerge from
this map?

© Mark Johnson,
InThinking www.thinkib.net/Economics 7
Activity 7: Link to the paper one assessment

Examples of relevant paper one questions on income equality include:

(a) Using a Lorenz curve and the Gini coefficient, explain how income inequality is
measured. [10 marks]

(b) Using real world examples, evaluate the view that government policies aimed at reducing
income inequality will always reduce economic efficiency. [15 marks]

© Mark Johnson,
InThinking www.thinkib.net/Economics 8