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Chapter 19

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Economics 1021A/B
Vandna Bhatia

Chapter 19 Economic Inequality Measuring Economic Inequality • Market income equals the wages, interest, rent, and profit earned in factor markets before paying income taxes. • Total income equals market income plus cash payments to households by governments. • After-tax income equals total income minus tax payments by households to governments. • The income Lorenz curve graphs the cumulative percentage of income against the cumulative percentage of households. • The table shows the shows the percentage of income in each quintile group and the cumulative percentage of households and income. • The Lorenz curve graphs the cumulative income shares against the cumulative household percentages. • In this graph, the line of equality is the straight line running from zero to100 percent. • Point A tells us that the 20 percent of the population with the lowest incomes earn 4.9 percent of total income. • Point B tells us that the 40 percent of the population with the lowest incomes earn 15.5 percent of the total income. • Point C tells us that the 60 percent of the population with the lowest incomes earn 31.8percent of total income. • Point D tells us that the 80 percent of the population with the lowest incomes earns 55.8 percent of total income. • And by comparing point D and point E, we can see that the richest 20 percent of the population earn 44.2 percent of total income. • The figure on the right includes the Lorenz curve for wealth with the Lorenz curve for income. • Wealth is much more unequally distributed than income. • If wealth and income are measured in a consistent way, they both have the same distribution. • Poverty is a state in which a family’s income is too low to be able to buy the quantities of food, shelter, and clothing that are deemed necessary. • In Canada, poverty is measured in terms of a low-income cutoff. • The low-income cutoff is the income level, determined separately for different types of families, that is selected such that families with incomes below that limit normally spend 63.6 percent or more of their income on food, shelter, and clothing. • Source of income, household type, age of householder, number of children, education, and labour force status are the most important factors influencing incidence of low income. The Sources of Economic Inequality
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