Inequality OCR Year 2 Macro

The difference between income and wealth Income is a flow of money going to factors of production: Wages and salaries paid to people in work Money paid to people receiving benefits such as the state pension and tax credits Profits flowing to businesses / corporations Dividends distributed to shareholders Rental income to people who own and lease property Interest paid to owners of capital who hold money in deposit accounts or who own bonds

The difference between income and wealth Wealth is a stock concept Wealth can be held in different ways: Savings held in commercial bank deposits Ownership of shares issued by stock-market listed companies and equity stakes in private businesses Ownership of property / real estate Wealth held in corporate bonds and government bonds Wealth tied up in private (occupational) pension schemes and life assurance schemes In terms of global income inequality, the poorest two- thirds of the world’s people are estimated to receive less than 13 per cent of world income, while the richest 1 per cent take nearly 15 per cent (Source: UNDP HDI report for 2014)

World's 80 Richest People Have Same Wealth As Poorest 50%

Richest 62 people compared to Africa's poorest GDPs Branko Milanovic (City University, NY) has showed that a large part of global inequality depends on economic differences between countries rather than within them

The Kuznets Inequality Curve Gini Coefficient (Inequality) Industrialization and urbanization Tertiary-dominated economy + development of progressive tax and welfare systems Per capita GNI (PPP) The Kuznets Curve suggests that inequality often rises during a phase of rapid industrialisation and urbanization but there may come a point when increased welfare provision, progressive taxes and more balanced income growth across industries might lead to a fall in overall inequality at higher per capita incomes.

The Lorenz Curve Cumulative % of Income 100% Line of Equality The Lorenz Curve gives a visual interpretation of income or wealth inequality. The diagonal line shows a situation of perfect equality of income i.e. 50% of population has 50% of income 50% 0% Poorest Richest Households by Income – Quintile Distribution

The Lorenz Curve with High Inequality Cumulative % of Income 100% Line of Equality 50% Lorenz Curve (High Inequality) 0% Poorest Richest Households by Income – Quintile Distribution

The Lorenz Curve with less Inequality Cumulative % of Income 100% Line of Equality 50% Lorenz Curve (Low Inequality) Lorenz Curve (High Inequality) 0% Poorest Richest Households by Income – Quintile Distribution

Using the Lorenz Curve to measure Gini Coefficient Cumulative % of Income 100% Line of Equality Gini coefficient = Area A Divided by Area A + Area B A Lorenz Curve B 0% Poorest Richest Households by Income – Quintile Distribution

The Gini Coefficient The Gini coefficient condenses the entire income distribution for a country into a single number between 0 and 1: the higher the number, the greater the degree of income inequality. The Gini coefficient ranges from zero, when everyone has the same income, to 1, when a single individual receives all the income A Gini coefficient above 0.4 is often seen as an important point. Inequality above this level is frequently associated with political instability and growing social tensions.

Countries with highest Gini Coefficient in 2012

Gini Coefficient for Household Income in the USA The Gini coefficient measures the inequality among values of a frequency distribution (for example levels of income). A Gini coefficient of zero expresses perfect equality where all values are the same (for example, where everyone has an exactly equal income). A Gini coefficient of one (100 on the percentile scale) expresses maximal inequality among values (for example where only one person has all the income).

Gini Coefficient for China from 2005 to 2015 The Gini coefficient measures the inequality among values of a frequency distribution (for example levels of income). A Gini coefficient of zero expresses perfect equality where all values are the same (for example, where everyone has an exactly equal income). A Gini coefficient of one (100 on the percentile scale) expresses maximal inequality among values (for example where only one person has all the income).

Alternative Measures of Income Inequality Quintile ratio This is the ratio of the average income of the richest 20% of the population to the average income of the poorest 20% of the population An alternative measure is the average income of the richest 10% of the population to the average income of the poorest 10% of the population Palma ratio This is the ratio of the richest 10% of the population's share of gross national income divided by the poorest 40%'s share Gini coefficient A Gini index of 0 represents perfect equality, while an index of 1 implies perfect inequality. Zambia has a very high level of income inequality measured this way

Countries with Highest Income Inequality (2014) Quintile ratio 80th/20th Palma ratio Gini coefficient Seychelles 18.8 6.4 65.8 South Africa 28.5 8.0 65.0 Namibia 19.6 5.8 61.3 Botswana 22.9 60.5 Haiti 26.6 5.5 59.2 Zambia 17.4 4.8 57.5 Honduras 23.5 5.0 57.4 Central African Republic 18.0 4.5 56.3 Lesotho 20.4 4.3 54.2 Colombia 17.5 4.0 53.5 Brazil 16.9 3.8 52.7 Chile 12.6 3.3 50.8 Rwanda 11.0 3.2 Costa Rica 12.8 2.9 48.6 Mexico 11.1 2.8 48.1 Paraguay 13.0 48.0 Kenya 47.7 Malawi 9.7 2.6 46.2

Countries with Lowest Income Inequality (2014) Quintile ratio 80th/20th Palma ratio Gini coefficient Hungary 4.5 1.0 28.9 Netherlands Kazakhstan 4.0 28.6 Afghanistan 27.8 Finland Romania 4.1 0.9 27.3 Denmark 26.9 Norway 26.8 Slovakia 26.6 Belarus 3.8 26.5 Czech Republic 3.9 26.4 Iceland 26.3 Sweden 3.7 26.1 Slovenia 3.6 0.8 24.9 Ukraine 3.4 24.8