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Econ: What is Income Distribution? 2 Views


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What is Income Distribution? Income distribution is the way in which income is spread throughout a society. If everyone made the same amount of money, like in a communist society, income distribution would be equal.

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Transcript

00:00

And finance Allah shmoop What is income distribution All right

00:08

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

00:12

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

00:16

in a country and or around the world But normally

00:19

the way we look ATT income distribution is to divide

00:22

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

00:26

then we can look at how much of the total

00:27

GDP pie each of those equal groups of people is

00:30

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

00:34

an equal distribution of income The more unequal the pie

00:38

slices look while the more unequal income distribution is those

00:42

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

00:45

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

00:48

economics which are called normative statements many people think that

00:52

the more unequal income distribution is the less fair it

00:56

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

00:59

idea that extreme income inequality can actually be bad for

01:03

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

01:06

depends how you define the economy Economist have come up

01:09

with a genius tool for making measuring income distribution as

01:12

easy as pie and well actually even better than a

01:15

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

01:19

coefficient These things right here if a nation was perfectly

01:22

equal it would be a straight diagonal line like this

01:27

If you look at the X and Y axes well

01:29

this makes sense The X axis is the buckets of

01:31

people in the Y Axis is the percent of money

01:33

to be spread among them on a straight line The

01:35

bottom ten percent of people are getting well ten percent

01:38

of the money The bottom fifty percent of people are

01:40

getting fifty percent of the money in the bottom ninety

01:42

year getting ninety percent right The more saggy the line

01:45

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

01:47

Well for instance as income distribution has become less and

01:50

less equal in recent decades sort of depending on how

01:53

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

01:56

Sagheer and saggy er just like your skin will one

01:59

day Sadly trust us in this graph Using data from

02:02

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

02:05

Denmark in Hungary two of the countries with some of

02:08

the most equitable income distribution with Namibia one of the

02:12

least equitable The first line below the blue one is

02:15

Denmark In the second between the yellow silver and red

02:18

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

02:22

See how saggy Namibia is Well if you look at

02:24

the bottom eighty percent of the people the four on

02:27

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

02:29

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

02:32

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

02:35

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

02:37

look at the Gini coefficient Well the Gini Coefficient takes

02:40

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

02:44

number You know like a jet I take a look

02:47

at this graph The more sag there is to our

02:50

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

02:53

smaller the B area gets the Gini coefficient is a

02:57

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

03:00

our perfectly equal straight line well then the area is

03:04

zero making our Gini coefficient also zero But what if

03:07

the saggy sag sags all the way down to the

03:10

X axis which means income is distributed really really unequally

03:15

Well that would make the Gini coefficient one right Gini

03:18

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

03:21

between zero and one sometimes expressed as a decimal or

03:24

a percentage the closer to zero The more equal the

03:28

income distribution in the closer the one the less equal

03:31

Well the Gini Coefficient takes all those numbers the stilling

03:34

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

03:37

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

03:41

good to remember these air more estimates than actual numbers

03:43

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

03:47

international politicking and all the other crap that goes behind

03:51

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

03:53

been sagging as time goes by at least in the

03:56

modern era with income distribution getting less and less equal

03:59

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

04:02

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

04:06

How do they work Well there are progressive taxes and

04:09

regressive taxes Progressive taxation is where you pay a higher

04:13

percentage in taxes The more money you make For instance

04:17

in the country of United Simpleton Sze Everyone pays ten

04:21

percent on their first twenty grand than twenty percent on

04:24

their next eighty and then fifty percent on any income

04:27

over one hundred grand Well these different buckets are called

04:30

tax brackets and under this quote progressive unquote tax system

04:34

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

04:36

ten percent on his first twenty grand of income and

04:38

twenty percent on his last ten thousand of income That

04:41

leaves Billy Bob with twenty six grand to live on

04:44

Well then he have Joe Schmoe who makes one point

04:46

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

04:48

first twenty grand twenty on his next eighty and fifty

04:51

percent on his remaining one point four million That leaves

04:54

Joe Schmo with seven hundred eighty two thousand dollars to

04:56

live on A regressive tax also known as a flat

05:00

tax is where all income is taxed at the same

05:03

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

05:05

regressive tax since it takes a more meaningful percentage of

05:08

income from low income people compared to high income people

05:12

to pay those taxes For instance if the united simple

05:15

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

05:17

Well that would leave Billy Bob with twenty two thousand

05:19

five hundred dollars and Joe Schmo with one million one

05:22

hundred twenty five thousand dollars Well because there are so

05:24

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

05:26

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

05:29

taxation and social programs and public services are best to

05:32

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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