ShmoopTube

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And finance Allah shmoop What is income distribution All right

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What's income distribution Well it's income You know those paychecks

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you get sometimes Yeah how it's distributed among the masses

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in a country and or around the world But normally

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the way we look ATT income distribution is to divide

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a nation's population into five or ten equal groups And

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then we can look at how much of the total

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GDP pie each of those equal groups of people is

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getting well When the pie slices are sliced equally that's

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an equal distribution of income The more unequal the pie

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slices look while the more unequal income distribution is those

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are just the facts and what we'd call positive economic

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statements But it's normal Have opinions When we're talking about

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economics which are called normative statements many people think that

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the more unequal income distribution is the less fair it

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is Plus there's some economic theory and research backing the

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idea that extreme income inequality can actually be bad for

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the economy But well even that's up for debate It

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depends how you define the economy Economist have come up

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with a genius tool for making measuring income distribution as

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easy as pie and well actually even better than a

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pie chart It's called the Loren's Curve and the Gini

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coefficient These things right here if a nation was perfectly

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equal it would be a straight diagonal line like this

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If you look at the X and Y axes well

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this makes sense The X axis is the buckets of

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people in the Y Axis is the percent of money

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to be spread among them on a straight line The

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bottom ten percent of people are getting well ten percent

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of the money The bottom fifty percent of people are

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getting fifty percent of the money in the bottom ninety

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year getting ninety percent right The more saggy the line

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is like there's the sags the less equal it is

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Well for instance as income distribution has become less and

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less equal in recent decades sort of depending on how

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you do the math the US Lauren's curve has gotten

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Sagheer and saggy er just like your skin will one

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day Sadly trust us in this graph Using data from

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the late nineties in early two thousand's you can compare

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Denmark in Hungary two of the countries with some of

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the most equitable income distribution with Namibia one of the

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least equitable The first line below the blue one is

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Denmark In the second between the yellow silver and red

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area is Hungary and the third one that one's Namibia

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See how saggy Namibia is Well if you look at

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the bottom eighty percent of the people the four on

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the X axis there you'LL see that they were only

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getting twenty one point three percent of the nation's income

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Now that you understand how Lauren's curves work either keeping

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things tight or saggy there we're going to take a

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look at the Gini coefficient Well the Gini Coefficient takes

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the Lauren's curve reducing income distribution down to a single

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number You know like a jet I take a look

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at this graph The more sag there is to our

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Lauren's curve while the bigger the area gets and the

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smaller the B area gets the Gini coefficient is a

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over a plus B If our Lauren's curve overlaps with

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our perfectly equal straight line well then the area is

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zero making our Gini coefficient also zero But what if

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the saggy sag sags all the way down to the

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X axis which means income is distributed really really unequally

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Well that would make the Gini coefficient one right Gini

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coefficients are ratios so they're always expressed as a number

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between zero and one sometimes expressed as a decimal or

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a percentage the closer to zero The more equal the

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income distribution in the closer the one the less equal

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Well the Gini Coefficient takes all those numbers the stilling

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income distribution into one single number meaning that it's super

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easy to compare income distribution of different countries Though it's

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good to remember these air more estimates than actual numbers

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Since most countries inflate or deflate their GDP numbers they're

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international politicking and all the other crap that goes behind

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it So just is the U S Lauren's curve has

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been sagging as time goes by at least in the

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modern era with income distribution getting less and less equal

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It's Jeannie Cooper Fishing has been getting bigger and bigger

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Okay so what's the role of taxes in income distribution

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How do they work Well there are progressive taxes and

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regressive taxes Progressive taxation is where you pay a higher

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percentage in taxes The more money you make For instance

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in the country of United Simpleton Sze Everyone pays ten

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percent on their first twenty grand than twenty percent on

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their next eighty and then fifty percent on any income

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over one hundred grand Well these different buckets are called

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tax brackets and under this quote progressive unquote tax system

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Billy Bob who makes thirty grand a year's tax at

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ten percent on his first twenty grand of income and

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twenty percent on his last ten thousand of income That

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leaves Billy Bob with twenty six grand to live on

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Well then he have Joe Schmoe who makes one point

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five million dollars Well he's taxed ten percent of his

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first twenty grand twenty on his next eighty and fifty

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percent on his remaining one point four million That leaves

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Joe Schmo with seven hundred eighty two thousand dollars to

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live on A regressive tax also known as a flat

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tax is where all income is taxed at the same

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rate No matter how much you make it's called a

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regressive tax since it takes a more meaningful percentage of

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income from low income people compared to high income people

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to pay those taxes For instance if the united simple

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Don's had to pay twenty five percent on their income

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Well that would leave Billy Bob with twenty two thousand

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five hundred dollars and Joe Schmo with one million one

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hundred twenty five thousand dollars Well because there are so

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many normative opinions on what's fair when it comes the

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income distribution there's plenty of debate over what level of

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taxation and social programs and public services are best to

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use So yeah there's certainly plenty room for all this 00:05:34.933 --> [endTime] debate but on leave politics for another video Oh

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