Introduction

Today, the top one per cent of incomes in the United States accounts for one fifth of US earnings. The top one per cent of fortunes holds two-fifths of the total wealth. Just one rich family, the six heirs of the brothers Sam and James Walton, founders of Walmart, are worth more than the bottom 40 per cent of the American population combined ($115 billion in 2012). This clearly indicates the

DEFINE ECONOMIC EFFICIENCY

DEFINE INEQUALITY - Measuring inequality Lorenz curve (who invented in and put in the diagram) use the countries diagram during industrialisation - France was most unequal in 1788 and this could even account for the revolution in 1789. - Data was from the byzantine times up till Poland before it started to industrialise -

Market economies rely on the price mechanism to allocate resources. This means that economic resources are allocated prices which reflect demand and supply, which operate via incentives. For example, rising wages act as an incentive to labour to become more employable, and provide a reward for those that do. Inequality, therefore, acts as an incentive to improve and specialise in producing those goods, services, and resources that command the highest reward. However, critics of unregulated market economies raise doubts about the need for such vast differences in income that exist in the UK, and many other economies, and that significantly smaller differences would create a sufficient incentive to reward effort, ability, and wealth creation. For example, an average wage of 5,000 per week for a professional footballer would be more than sufficient to encourage gifted young footballers to want to become a professional player. This compares with wages of over 100,000 per week for the best players.

Measuring inequality of income

The two main methods for measuring inequality are the Lorenz curve and the Gini index.

The Lorenz curve

A Lorenz curve shows the % of income earned by a given % of the population. A perfect income distribution would be one where each % received the same % of income.

Perfect equality would be, for example, where 60% of the population gain 60% of national income. In the above Lorenz curve, 60% of the population gain only 20% of the income, hence the curve diverges from the line of perfect equality of income. The further the Lorenz curve is from the 45 degree line, the less equal is the distribution of income.

Changes in the position of the Lorenze curve indicates changes in the distribution of income. In this example, the curve for 2010 is further away from the line of equal distribution than the curve in 1990, implying a wider distribution of income.

The Gini co-efficient and index The Gini co-efficient or index is a mathematical device used to compare income distributions over time and between economies. The Gini co-efficient can be used in conjunction with the Lorenz curve. It is calculated by comparing the area under the Lorenz curve and the area from the 450 line to the right hand and 'x' axis. In terms of the Gini index, the closer the number is to 100 the greater the degree of inequality.

Although inequality has steadily increased over the last 30 years, the double dip recession had a greater impact on middle and higher income levels, and the Index fell from 36 to 34 between 2009 and 2011.