First measure the gap, then judge it

Civics & Economics · Economics · ages 16-18

Name ______________________ Date ____________

For a household-income Lorenz curve, what does the equality diagonal show?
- Each cumulative household share receives the same income share
- The highest-income fifth receives the entire income while other households receive none
- The curve shows only the incomes of households above the national average
What is a household-income quintile?
- One of five groups with equal total household income
- One of five equally sized groups of ranked households
- One of five regions chosen without ranking household incomes
A Gini of 1 means perfect equality.
Circle one: True False
Which is often more unequally distributed, and what can help explain the difference?
- Income; annual receipts necessarily grow faster than assets do
- Wealth; debts are ignored when net wealth is measured at a date
- Wealth; unequal saving, returns and inheritances can accumulate
Two countries use comparable nonnegative income data with positive totals. One has Gini 0.5 and the other 0.3. What does 0.5 tell you?
- The top fifth must receive exactly fifty percent of all income
- Its curve must lie below the other curve at every point
- It has a larger area gap relative to the equality triangle
You want to compare income inequality in two countries. Which approach makes the measures more comparable?
- Use different years and units as long as both totals are in coins
- Use the same year, income definition and unit of comparison
- Compare income in one country with net wealth in the other
Which statement gives an opportunity-based argument against excessive inequality?
- Unequal access to schooling can waste talent and restrict opportunity
- Any Gini above zero proves that all differences in earnings are unjust
- A low Gini by itself proves that every household has good living standards
Which statement gives an incentive-based argument for allowing some income inequality?
- Extra rewards can encourage training, effort and business investment
- Every income gap proves that rewards already match useful contributions
- Unequal incomes always give everyone the same incentive to take risks

Answer key

For grown-ups. Fold this page away before handing over the rest.

First measure the gap, then judge it W1-mt_oQhtuk8b8T-s1

Each cumulative household share receives the same income share · The equality line gives the bottom 20% of households 20% of income, the bottom 40% 40%, and so on.
One of five equally sized groups of ranked households · Each income quintile contains 20% of households ranked by income. Their income totals can differ.
False · Equality gives a Gini of 0. Values near 1 on the usual scale indicate extreme concentration.
Wealth; unequal saving, returns and inheritances can accumulate · Unequal saving, returns and inheritances can build wealth gaps over time. Wealth is often more unequal than income, but not in every country.
It has a larger area gap relative to the equality triangle · A larger Gini means a larger relative area gap. It does not fix quintile shares or mean the curves cannot cross.
Use the same year, income definition and unit of comparison · Match the year, income definition and person or household unit. Check whether both measures include taxes and transfers in the same way.
Unequal access to schooling can waste talent and restrict opportunity · Schooling barriers can prevent people from developing their abilities. Gini alone does not establish such barriers, fairness or living standards.
Extra rewards can encourage training, effort and business investment · Rewards may encourage useful activity. The argument depends on what creates those rewards and does not justify every income gap.