Quiz 18: Information and Behavioural Economics

Business

Income distribution: Income distribution refers to the distribution of nation's Gross Domestic Product (GDP) among the population. Shift of the U.S. income distribution: The households are classified under five income quintiles. The first quintile is the poorest households and the fifth quintile is the richest households. The income share of richest quintile to the total household income of U.S. has increased from 43.7 percent in the year 1980 to 50.2 percent in the year 2010. The income share was higher due to the more number of individuals worked in the richest quintile. In the richest quintile, 2 to 4 people were working per household. There was a reduction in the top marginal tax that gave less interest to avoid the tax, which in turn increased the reported income.On the other hand, the income share of poorest quintile to the total household income of U.S. has decreased from 4.3 percent in the year 1980 to 3.3 percent in the year 2010. The income share was lower due to the growth of the single parent and lower number of person worked in the poorest quintile. In the poorest quintile, 1 person was working per household.

Lorenz curve: Lorenz curve shows the percentage share of total income earned by different stratum of population when the population is arranged in an ascending order (from smaller income to highest income). This curve is used to graphically represent the income inequality. Interpretation of U.S. Lorenz curve: The 45 degree straight line represents the equality of income. The income inequality line is measured by the deviation that exists between the 45 degree straight line and the Lorenz curve. If the Lorenz curve travelled along the straight line, then there is no income inequality. The more is the difference between the 45 degree straight line and the Lorenz curve, the higher will be the level of inequality and vice versa.Observations from the Lorenz curve given in the text book (Exhibit 2)- The Lorenz curve for the 1980s is closer to the 45 degree straight line than the Lorenz curve for 2010. - This implies that there was a higher income inequality in the year 2010 than in 1980. - It also reveals that 20 percent of the households accounted for nearly 50 percent of the income in both the time periods.

Marriage trend widening the gap between high-income and low-income households: Few years back, there were fewer women who enrolled higher education. At that time, high professional males married women with less education or less earnings. But now, nearly 50 percent of women have enrolled in medical and law schools. At times, the percentage of women in medical and law schools dominated males. This change gives the opportunity to choose a life partner with similar educational qualification or the person who earns a similar income. Therefore, the income of the higher income household increases and their children inherit this with all their advantages. On the other hand, a person with low education would earn less income. Owing to his low educational status and poor income, he has to choose a life partner with less education and low income. Hence, their household income does not increase significantly. Very few are from the below middle class who tend to join in the best colleges. The very step decides whether he is going to be the high income holder or not the low. This is one of the reasons, the less income households are staying the same whereas, the high income households are leading a happy life. Hence, this marriage trend makes the widening gap between the high income and low income people.

Related Quizzes