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
• 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
• Wealth is much more unequally distributed
• If wealth and income are measured in a
consistent way, they both have the same
• 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