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Income distribution and income inequality
Income distribution

What is “income distribution”?

According to Oxford Economics dictionary income distribution is “The division of total income between different recipients. *Functional income distribution is the division of income between the owners of the different factors of production. *Personal income distribution is the distribution of income classified by size. Income distribution can be measured before and after the deduction of direct taxes and the addition of transfers.” (pg 216)


Income distribution just represents, how the income is distributed amongst the people in an economy. Some countries face a huge problem of income inequality and income inequality is “Income inequality describes the extent to which income is distributed unevenly among residents of an area. High levels of inequality indicate that a small number of people receive most of the total income, and that most people receive only a small share of the total.” (

It’s almost impossible to list all the causes for income inequality, but some of them would be:
1) An increase in wage premium for education. (Education is valued more nowadays then few decades ago. This could be explained because just a few decades ago manual labor was more spread, and basically everything was done with manual labor in western countries. Nowadays manual labor is replaced with machinery. For example, we have a farm X, and farm X employed 100 workers last year, however this year they bought a new tractor, and now they only need 50 workers. The rest of the workers will become unemployed (most likely seasonal unemployment). Therefore the workers will continue receiving wage, and their income will stay at the same level, but the rest of the workers will be living off savings. Now, imagine how it is with big firms… If a firm chooses to use robots and save money, instead of keeping their workers. The rich would get richer because they have bigger profit, and the poor (manual labor workers in this case) would become poorer.
2) Another reason could be that women wages have increased, therefore there is a drastic difference in family which have both of the parents working or in a family where only one of the parents is.
3) The premiums for CEO’s have drastically increased since couple decades ago, therefore the rich pocket even more money, however most of their money doesn’t come from their wage, but investment in stocks and etc (other source of income).

If income inequality wouldn’t exist than people wouldn’t be stimulated to work harder to get more money. Therefore some income inequality is good for the economy, because it stimulates the people to work harder, however the gap can’t be too big. The idea behind communism was that every one is equal; therefore they wanted to have a situation where there is no income inequality. Unfortunately for them, human nature will never allow this to happen, because we always want more.

Consequences for income inequality are:
1) Illegal drug use
2) Infant mortality rate
3) Homicide rate
4) Educational performance

To measure income inequality, we have to use Gini coefficient, and Oxford Economics dictionary defines Gini coefficient “A statistical measure of inequality.” 0 on the Gini coefficient represents complete equality, but 100 represents complete inequality.

Gini coefficient for some countries:

Country Gini coefficient

Finland 29.5
Latvia 36.0
South Africa 65.0

This information is from few years ago. (2004-2005)

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Category: IB2 Economics | Views: 428 | Added by: dbondars | Rating: 0.0/0
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