Question

Recently President Obama has tried to focus public attention on inequality.
a. What is the difference between income inequality and wealth inequality?
b. Most policies that target inequality either target it at the low end of the
income distribution by trying to increase wages of low-income workers, or at
the high end of the income distribution by limiting wages of high-income
workers. List a few potential policies of each type.
c. In your opinion, should the government focus on the low end or the high
end? Why?
d. In order to better understand how sensitive inequality measures are to the
choice of measure, provide a graph of an economy with a 90-10 wage gap
that is essentially zero but for which the Gini coefficient is close to 1.

Answer 1

Answer a- Income inequality, in economics refers to the wide disparity in the distribution of income between individuals, groups, populations, social classes, or countries. It implies the concentration of a large portion of income usually in the hands of a small percentage of a population while the remaining percentage of population usually has the lowest amount of remaining income shared among them. When there is income inequality in a society or economy, there is a large gap between population segment i.e.between the rich and the poor.

Another form of inequality that exists among individuals, groups, populations, social classes, or countries is wealth inequality. Wealth inequality is different from income inequality because it is the the unequal distribution of assets between individuals, groups, populations, social classes etc. Here wealth means varirty of assets like  houses, automobiles, personal belongings, businesses, property, savings, and investments etc.

Let us understand the difference between wealth inequality and income inequality with the help of an example-

Let us consider two person X and Y. Both have an equal income of $50,000 per year. But, person X has asset worth of $1 million which perrson Y has none. In this case we have no income inequality as both person X and Y has equal income but here,  person X has more asset while Person Y struggles to survive without any asset. Thus, there exists wealth inequality in this example but no income inequality.