Income, Wealth and the Lorenz Curve

income The flow of money to a person or household Includes wages, rent, interest, profit Time related (we earn income over a period)

So... What is wealth

Wealth is… A stock of assets OWNED by an individual or group It often includes property and savings and is measured in dollar terms It can be defined as our NET WORTH

NET WORTH OWN OWE Total Assets XXX Less: Total Liabilities XX Net worth XXX

The income / wealth relationship To get wealth, people must give up consumption (ie stop spending some of our income). Whenever we spend, there is an OPPORTUNITY COST - we give up the opportunity of creating FUTURE income because we have not accumulated current income as wealth.

“RICH” and “POOR” INCREASES So… IT TAKES MONEY TO MAKE MONEY Spare income is required in order to invest in assets that will generate more income And since households with more income to begin with are able to allocate more to these income generating assets AND THE GAP BETWEEN THE RICH GET RICHER “RICH” and “POOR” INCREASES

So…Income is a Flow…. and ………. Wealth is a Store

The Lorenz Curve This shows how EQUALLY income is distributed by HOUSEHOLD. 20 40 60 80 100

Both the horizontal and vertical sides = 100% Lorenz Curve Steps: 100% One: We draw a square... Both the horizontal and vertical sides = 100% 100%

Two. Label the axis Lorenz Curve % of households along the base 100 and % of household income received on the vertical axis 80 % of household income Three. Show an Equal Income Distribution a straight line... 60 40 In other words, 20% of households... 20 would receive 20% of household income, and 40% of households would receive 40% of income etc. 20 40 60 80 100 % of households richest poorest

The curve sags because there is UNEQUAL DISTRIBUTION % of households % of household income 20 40 60 80 100 Lorenz Curve Steps: Four: Plot the unequal distribution curve END The curve sags because there is UNEQUAL DISTRIBUTION the poorest 20% of households actually earn LESS than 20% of the income…and so on Note that the curve always begins at the origin This is because 0% of households earn 0% of income and 100% of households earn 100% of income And ends at the top right corner ORIGIN % of households richest poorest

This line would be impossible % of household income 20 40 60 80 100 Lorenz Curve This line would be impossible % of households richest poorest

This line would show wealth as wealth is more unequal than income % of household income 20 40 60 80 100 Lorenz Curve This line would show wealth as wealth is more unequal than income % of households richest poorest

ASSUMPTIONS All incomes are declared 2. No “in kind” transfers eg Salvation Army food banks or free medical care The Lorenz curve therefore understates the share of incomes going to lower-income households that benefit from these transfers 3. All households are the same size

LIMITATIONS The actual make-up of households is changing over time 2. The curve shows the gap between high and low income earners but does not show changes in the REAL level of income earned by each group 3. Some people in the low income quintiles may be there temporarily with expectations of higher incomes in the future (eg university students) 4. The curve does not show the equality of OPPORTUNITY to move to other income levels

the Liddle Production House The end the Liddle Production House