FACTOID # 28: Austin, Texas has more people than Alaska.
 
 Home   Encyclopedia   Statistics   States A-Z   Flags   Maps   FAQ   About 
   
 
WHAT'S NEW
 

SEARCH ALL

FACTS & STATISTICS    Advanced view

Search encyclopedia, statistics and forums:

 

 

(* = Graphable)

 

 


Encyclopedia > Income inequality metrics

Income inequality metrics or income distribution metrics are techniques used by economists to measure the distribution of income among the participants in a particular economy, such as that of a specific country or of the world in general. These techniques are typically categorized as either absolute measures or relative measures. Image File history File links Broom_icon. ... Income, generally defined, is the money that is received as a result of the normal business activities of an individual or a business. ...


Income distribution has always been a central concern of economic theory and economic policy. Classical economists such as Adam Smith, Thomas Malthus and David Ricardo were mainly concerned with factor income distribution, that is, the distribution of income between the main factors of production, land, labour and capital. Adam Smith FRSE (baptised June 5, 1723 O.S. / June 16 N.S. – July 17, 1790) was a Scottish moral philosopher and a pioneering political economist. ... Robert Thomas Malthus, FRS (13th February, 1766 – 29th December, 1834), usually known as Robert Malthus, although he preferred to be known as Thomas Malthus, was an English demographer and political economist. ... David Ricardo (18th April, 1772–11th September, 1823), a political economist, is often credited with systematizing economics, and was one of the most influential of the classical economists, along with Thomas Malthus and Adam Smith. ... Distribution in economics is the way total output and income from it is distributed among individuals and among factors of production (such as between labor and capital) (Samuelson and Nordhaus, 2001, p. ... In economics, factors of production are resources used in the production of goods and services. ...


Modern economists have also addressed this issue, but have been more concerned with the distribution of income across individuals and households. Important theoretical and policy concerns include the relationship between income inequality and economic growth. The article economic inequality discusses the social and policy aspects of income distribution questions. Differences in national income equality around the world as measured by the national Gini coefficient. ...

Contents

Absolute income criteria

Absolute measures define a minimum standard, then calculate the number (or percent) of individuals below this threshold. These methods are most useful when determining the amount of poverty in a society. Examples include: A boy from an East Cipinang trash dump slum in Jakarta, Indonesia shows what he found. ...

  • Poverty line - This is a measure of the level of income necessary to subsist in a society. It varies from place to place and from time to time, depending on the cost of living and people's expectations. It is usually defined by governments and calculated as that level of income at which a household will devote two thirds (to three quarters) of its income to basic necessities such as food, water, shelter, and clothing.
  • Poverty index - This index was developed by Amartya Sen. It takes into account both the number of poor and the extent of their poverty. Sen defined the index as:
I = (P/N)(B − A)/A

where: Map of countries showing percentage of population who have an income below the national poverty line The poverty line is the level of income below which one cannot afford to purchase all the resources one requires to live. ... This article does not cite any references or sources. ...

P = number of people below the poverty line
N = total number of people in society
B = poverty line income
A = average income of those people below the poverty line

Relative income criteria

Differences in national income equality around the world as measured by the national Gini coefficient. The Gini coefficient is a number between 0 and 1, where 0 corresponds with perfect equality (where everyone has the same income) and 1 corresponds with perfect inequality (where one person has all the income, and everyone else has zero income). Countries in red tones have societies with more income inequality than those in green tones.
Differences in national income equality around the world as measured by the national Gini coefficient. The Gini coefficient is a number between 0 and 1, where 0 corresponds with perfect equality (where everyone has the same income) and 1 corresponds with perfect inequality (where one person has all the income, and everyone else has zero income). Countries in red tones have societies with more income inequality than those in green tones.

Relative income compares the income of one individual (or group) with the income of another individual (or group). These measures are most useful when analyzing the scope and distribution of income inequality. Examples include: Image File history File links Download high resolution version (1272x864, 72 KB) Summary Wikipedian author released this into PD Licensing File history Legend: (cur) = this is the current file, (del) = delete this old version, (rev) = revert to this old version. ... Image File history File links Download high resolution version (1272x864, 72 KB) Summary Wikipedian author released this into PD Licensing File history Legend: (cur) = this is the current file, (del) = delete this old version, (rev) = revert to this old version. ... Graphical representation of the Gini coefficient The Gini coefficient is a measure of inequality of a distribution. ...

  • Percentile distributions - One percentile is compared to another. For example, it might be determined that the income of the top ten-percentile is only slightly more than the bottom forty-percentile. Or it might be determined that the top quartile earns 45% of the society's income while the bottom quartile has 10% of society's income. The interquartile range is a standard percentile range from 25% to 75%.
  • Lorenz curve - This is a graphic device used to display the relative inequality in a distribution of income values. A society's total income is ordered according to income level and the cumulative total graphed.
  • Gini coefficient - This is a summary statistic used to quantify the extent of income inequality depicted in a particular Lorenz curve.
  • Robin Hood index - Mathematically related to the Gini coefficient, it measures the portion of the total income that would have to be redistributed in order for there to be perfect equality.
  • Theil index - This is also a summary statistic used to measure income inequality, based on information entropy. It is similar to, but less commonly used than the Gini coefficient.
  • Standard deviation of income - This measures income dispersion by assessing the squared variance from the mean. This metric is seldom seen, its use limited to occasional reference in academic journals.
  • Relative poverty line - This is a measure of the number or proportion of people or households whose level of income is less than some given fraction of typical incomes. This form of poverty measurement tends to concentrate concern on the bottom half of the income distribution and pay less attention to ineqalities in the top half. See poverty line for details.

// A percentile is the value of a variable below which a certain percent of observations fall. ... In descriptive statistics, the interquartile range (IQR) is the difference between the third and first quartiles and is a measure of statistical dispersion. ... The Lorenz curve is a graphical representation of the cumulative distribution function of a probability distribution; it is a graph showing the proportion of the distribution assumed by the bottom y% of the values. ... Graphical representation of the Gini coefficient The Gini coefficient is a measure of inequality of a distribution. ... The Robin Hood index is a measure of income inequality. ... The Theil index, derived by econometrician Henri Theil, is a statistic used to measure economic inequality. ... Claude Shannon In information theory, the Shannon entropy or information entropy is a measure of the uncertainty associated with a random variable. ... In probability and statistics, the standard deviation of a probability distribution, random variable, or population or multiset of values is a measure of the spread of its values. ... Map of countries showing percentage of population who have an income below the national poverty line The poverty line is the level of income below which one cannot afford to purchase all the resources one requires to live. ...

Defining income

All of the above measures use income as the basis for evaluating poverty. However, 'income' is here understood different to a common understanding: It means the total amount of goods and services that a person receives, and thus there is not necessarily money or cash involved. If a poor subsistence farmer in Uganda grows her own grain it will count as income. Services like public health and education are also counted in. Often expenditure or consumption (which is the same in an economic sense) is used to measure income. The World Bank uses the so-called living standard measurement surveys (LSMS) to measure income. These consist of questionnaires with 200+ questions. Surveys have been completed in most developing countries. Logo of the World Bank The International Bank for Reconstruction and Development (IBRD, in Romance languages: BIRD), better known as the World Bank, is an international organization whose original mission was to finance the reconstruction of nations devastated by WWII. Now, its mission has expanded to fight poverty by means...


Criticisms of income inequality metrics

  1. It is not clear how income should be defined. Should it include capital gains, imputed house rents from home ownership, and gifts? If these income sources or alleged income sources (in the case of "imputed rent") are ignored (as they often are), how might this bias the analysis? How should non-paid work (such as parental childcare or doing ones own cooking instead of hiring a chef for every meal) be handled? Wealth or consumption may be more appropriate measures in some situations. Broader metrics of human well-being might be useful.
  2. Should the basic unit of measurement be households or individuals? The Gini value for households is always lower than for individuals because of income pooling and intra-family transfers. The metrics will be biased either upward or downward depending on which unit of measurement is used.
  3. These income inequality metrics ignore life cycle effects. In most Western societies, an individual tends to start life with little or no income, gradually increase income till about age 50, after which incomes will decline, eventually becoming negative. This will have the effect of significantly overstating inequality. It has been estimated (by A.S. Blinder in The Decomposition of Inequality, MIT press) that 30% of measured income inequality is due to the inequality an individual experiences as they go through the various stages of life.
  4. Should real or nominal income distributions be used? What effect will inflation have on absolute measures? Do some groups (eg., pensioners) feel the effect of inflation more than others?
  5. How do we allocate the benefits of government spending? How does the existence of a social security safety net influence the definition of absolute measures of poverty. Do government programs support some income groups more than others?
  6. Income inequality metrics are seldom used to quantify and examine the causes of income inequality. Some alleged causes include: life cycle effects (age), inherited characteristics (IQ, talent), willingness to take chances (risk aversion), the leisure/industriousness choice, inherited wealth, economic circumstances, education and training, discrimination, and market imperfections.

These criticisms help to understand the problems caused by the improper use of inequality measures. However, they do not render inequality coefficients invalid. If inequality measures are computed in a well explained and consistent way, they can provide a good tool for quantitative comparisons of inequalities at least within a research project. In finance, a capital gain is profit that is realized from the sale of an asset that was previously purchased at a lower price. ... The well-being or quality of life of a population is an important concern in economics and political science. ...


Inequality, Growth and Progress

The question whether equality is beneficial for economic growth and progress has occupied the minds of the greatest scientific thinkers as well as policy makers. Evidence from a broad panel of recent academic studies shows the relation between income inequality and the rate of growth and investment is indeed robust however not linear.


Robert J. Barro, Harvard University found in his study Inequality and Growth in a Panel of Countries that higher inequality tends to retard growth in poor countries and encourage growth in well developed regions. In their study for the World Institute for Development Economics Research , Giovanni Andrea Cornia and Julius Court (2001) reach analogous conclusions. The authors therefor recommend to pursue moderation also as to the distribution of wealth and particularly to avoid the extremes. Both very high egalitarianism and very high inequality cause slow growth.


Extreme egalitarianism leads to incentive traps, free-riding, high operation costs and corruption in the redistribution system, all reducing a country's growth potential. However also extreme inequality diminishes growth potential through the erosion of social cohesion, increasing social unrest and social conflict causing uncertainty of property rights, not to talk about misery and lower life expectancy.


Therefore public policy should target an ‘efficient inequality range’. The authors claim that such efficiency range roughly lies between the values of the Gini coefficients of 25 (the inequality value of a typical Northern European country) and 40 (that of countries such as China and the USA).


The precise shape of the inequality-growth relationship depicted in the Chart obviously varies across countries depending upon their resource endowment, history, remaining levels of absolute poverty and available stock of social programs, as well as on the distribution of physical and human capital.


See also :

  • Inequality and Growth: What Can the Data Say? Abhijit V. Banerjee and Esther Duflo

See also

Differences in national income equality around the world as measured by the national Gini coefficient. ... This graph shows the household income of the given percentiles from 1967 to 2003, in 2003 dollars. ... Income, generally defined, is the money that is received as a result of the normal business activities of an individual or a business. ... Per capita income ratio (PPP) around the world in the year 2000. ... A boy from an East Cipinang trash dump slum in Jakarta, Indonesia shows what he found. ... Map of countries showing percentage of population who have an income below the national poverty line The poverty line is the level of income below which one cannot afford to purchase all the resources one requires to live. ... The Millennium Development Goals are eight goals that 192 United Nations member states have agreed to try to achieve by the year 2015. ... Socioeconomics or Socio-economics is the study of the relationship between economic activity and social life. ... The rich get richer and the poor get poorer is a catchphrase and proverb, frequently used (with variations in wording) in discussing economic inequality. ...

References

External links

  • Survey data from the government of Sri Lanka
  • Luxembourg Income Study conducts comparative income inequality research
  • Software
    • Users of the R data analysis software can install the "ineq" package which allows to compute a variety of inequality metrics including Gini, Atkinson or Theil.
  • Two Americas: One Rich, One Poor? Understanding Income Inequality in the United States
  • Has US Income Inequality Really Increased?
  • [http://politicalcalculations.blogspot.com/2007/06/big-picture-shifting-incomes-from-1995.html

The Big Picture: Shifting Incomes from 1995 to 2005]


  Results from FactBites:
 
NationMaster - Encyclopedia: Social Inequality (798 words)
Social inequality is generally considered to be exponential as one traverses the strata of national and world societies from top-to-bottom.
Some argue that inequality is in large part the negative consequence of destructive state policies (such as capitalism) and wars, past and present, while others see inequality as the natural consequence of social darwinism (see IQ and the Wealth of Nations).
Social inequality is sometimes considered disproportionate to societal advancement; for example, feudalist societies are usually considered to have had higher levels of social inequality than advanced democracies.
NationMaster - Encyclopedia: Wage gap (489 words)
However, income disparity is also used by those people concerned with the low level of the minimum wage, relative to the income of the wealthy.
Income disparity is the situation where the output level of two workers is equal but their incomes are not as a result of unassociated bias.
Income inequality metrics or income distribution metrics are techniques used by economists to measure the distribution of income among members of a society.
  More results at FactBites »

 
 

COMMENTARY     


Share your thoughts, questions and commentary here
Your name
Your comments

Want to know more?
Search encyclopedia, statistics and forums:

 


Press Releases |  Feeds | Contact
The Wikipedia article included on this page is licensed under the GFDL.
Images may be subject to relevant owners' copyright.
All other elements are (c) copyright NationMaster.com 2003-5. All Rights Reserved.
Usage implies agreement with terms, 1022, m