Question

Use quintiles to briefly summarize the degree of income in-equality in the United States. How and to what extent does government reduce income inequality?

a. Assume that Al, Beth, Carol, David, and Ed receive incomes of $500, $250, $125, $75, and $50, respectively. Construct and interpret a Lorenz curve for this five-person economy. What percentage of total income is received by the richest quintile and by the poorest quintile?

b. How does the Gini ratio relate to the Lorenz curve? Why can’t the Gini ratio exceed 1? What is implied about the direction of income inequality if the Gini ratio declines from 0.42 to 0.35? How would one show that change of inequality in the Lorenz diagram?

c. Why is the lifetime distribution of income more equal than the distribution in any specific year?

Answer 1

Quintiles are the statistical values represented in the form of statistics or numbers. This is categorizing the income groups with respect to a certain class interval. This form of data is divided in the interval of 20 percent. For example, the total of 100 percent is divided in to the interval of 1 to 20, 20 to 40, 40 to 60, 60 to 80 and 80 to 100

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Considering the quintile report of the United States, the income distribution is mostly uneven. In the year 1993, the income distribution between the higher earning and lowering earning is very much uneven. During this year, 1 to 20 percent received 4.1 percent where as 80 to 100 percent received 47 percent.
In detail, the classes from 20 to 80 received fewer than 50 percent of the total income before tax. Comparing the upper and the lower class, the upper class say 60 to 100 percent received twice the income when compared to the lower three classes’ say 1 to 60 percent.
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The criticism made on the standard bureau’s census is that

1. The definition of income is very narrow; because the income statements of the household include the salaries, wages, dividends, interest and government cash transfers but the other possible sources of income are not included.
2. Like the wages and social security, the income to households from capital gains and government subsidies such as the kind transfers and the education represent as income.
3. As the census is measured annually, minor and significant figures are concealed which occur over the life time of the house hold or family; therefore resulting in showing lesser values in the bureau’s census than the total lifetime earnings.

[next step] Governments contribute to income equality:

Government plays a significant role in the income distribution inequality by taxing and transferring funds resulting in the higher income household paying more taxes and thus contributing to inequality.
As represented in the data, 80 percent of government's contribution to income equality takes place through transfer programs. This contribution is particularly significant for those in the lowest quintile, for whom government transfer payments comprise over 75 percent of total income.