Income Inequality

Definition

Income inequality refers to the unequal distribution of income and wealth within a population or across a society. It measures the degree to which the income or wealth of individuals or households varies across the economic spectrum.

5 Must Know Facts For Your Next Test

1. Income inequality is often measured using the Gini coefficient, which ranges from 0 (perfect equality) to 1 (perfect inequality).
2. Factors contributing to income inequality include differences in education, skills, access to employment, inheritance, and government policies.
3. High levels of income inequality can lead to social and political instability, as well as negatively impact economic growth and development.
4. GDP is a limited measure of a society's well-being, as it does not account for the distribution of income and wealth within a population.
5. Economic convergence, the process by which poorer countries or regions catch up to wealthier ones, can help reduce global income inequality.

Review Questions

• Explain how income inequality is related to the concept of the poverty line and the poverty trap.
  • Income inequality is closely linked to the poverty line and the poverty trap. The poverty line defines the minimum level of income needed to meet basic needs, and individuals or households below this line are considered to be living in poverty. The poverty trap refers to the self-reinforcing mechanisms that make it difficult for those in poverty to escape it, such as lack of access to education, healthcare, and financial services. High levels of income inequality mean that a significant portion of the population is struggling to meet the poverty line, and the poverty trap can perpetuate this inequality, making it challenging for individuals to improve their economic circumstances.
• Discuss how the safety net and government policies can address issues of income inequality.
  • The safety net, which includes government programs and policies designed to provide financial support and assistance to individuals and families in need, can play a crucial role in addressing income inequality. These programs, such as welfare, unemployment benefits, and subsidized healthcare and education, can help alleviate the effects of poverty and provide opportunities for individuals to improve their economic standing. Additionally, government policies, such as progressive taxation, minimum wage laws, and investments in education and infrastructure, can help reduce income inequality by redistributing wealth and creating more equitable economic opportunities.
• Analyze how the limitations of GDP as a measure of well-being are related to the issue of income inequality, and explain how the concept of economic convergence can help address this problem.
  • GDP, as a measure of a country's economic output, does not account for the distribution of income and wealth within a population. This means that a high GDP does not necessarily reflect the well-being of all members of society, as it fails to capture the extent of income inequality. High levels of income inequality can coexist with a relatively high GDP, masking the true state of a society's well-being. The concept of economic convergence, where poorer countries or regions catch up to wealthier ones, can help address this issue by reducing global income inequality. As poorer countries experience economic growth and development, the gap between the rich and the poor, both within and across countries, can narrow, leading to a more equitable distribution of resources and improved overall well-being.

Related terms

Poverty Line: The minimum level of income deemed adequate for a person to meet their basic needs, used to identify individuals or households living in poverty.

Poverty Trap: A self-reinforcing mechanism that causes poverty to persist, where factors such as lack of access to education, healthcare, and financial services make it difficult for individuals to escape poverty.

Safety Net: Government programs and policies designed to provide a minimum level of financial support and assistance to individuals and families in need, helping to alleviate the effects of poverty and income inequality.