Question

What is a common way to measure income inequality?

a. Compare the incomes of the highest income people to the incomes of the lowest income people on a monthly basis
b. Use the IRS data to compare the income of the 20 highest income people to the income of the 20 lowest income people.
c. Dividing ranked households into equal groups.
d. Compare the purchasing power of the highest income people to the purchasing power of the lowest income people.

Answer 1

A common approach to measure income inequality is to distribute households into quintiles and compare the share of total income each receives. Another method is to compare the income ratio between the top and bottom 10% earners. This analysis helps distinguish between poverty and economic inequality.

Step-by-step explanation:

Measuring Income Inequality

A common method for measuring income inequality is to rank households by their income and divide them into five equally sized groups, or quintiles. To perform a detailed analysis of the distribution of income, each quintile would contain 20% of the population. Income distribution by quintiles allows for a comparison of the share of total income each group receives, which can illustrate the economic disparities between them. Another way to assess income inequality is by comparing the top 10% of earners to the bottom 10% to identify the ratio of income disparity between these two groups. This ratio can highlight the extent of inequality but may not provide a complete picture, as it does not account for the middle-income groups.

It is important to note that income inequality is different from poverty, which is defined by the number of individuals falling below the poverty line, indicating the minimum income necessary for a basic standard of living. These measurements help to understand economic inequality and inform policy decisions to foster a more balanced income distribution.