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Income Inequality - Essay Example

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The uneven distribution of income in any given population is income inequality. In order for there to be income, there has to be several sources of income. These sources of income may…
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Income Inequality

Download file to see previous pages... The main reason he foresaw an evolution was due to the recurrent nature of income inequality. In an income inequality situation, the richer keep getting richer due to a better income, while the poor keep getting poorer. The gap between the top earners and the low-income earners keeps widening in an income inequality situation. In America, almost 95% of the national wealth is under 5% ownership; this situation leaves 95% of the population to scrounge for the limited 5% wealth (DeNavas et. Al, 2005).
For economic inequality study, a family makes the ideal study unit. In the study, the family’s income is under analysis, and then the family members ranked from the lowest income earner to the highest income earner. After the ranking, the incomes aid in establishing a Lorenz curve that is important in analysis of income. In order for a Lorenz curve to be correct, the incomes of the family members have to be divided into fifths (Lorenz, 1905). A Lorenz curve enables analysis of data by adding the percentage value of the lowest fifth to the next higher fifth, which becomes the first point of the curve. The second point in the curve comes about through adding the first point to the middle fifth of the derived incomes. The process of plotting continues until exhaustion of all cumulative values of member incomes (Lorenz, 1905).
For a perfect Lorenz curve, all members in a family would earn the same amount and the Lorenz curve would be a diagonal with the lowest point being the lower left hand corner moving progressively towards the higher right hand corner. This diagonal shows an ideal situation and it is the baseline in determining income inequality. Since not all family members receive an equal income, the Lorenz curve turns out as a curve instead of a diagonal. The area between the curve and the diagonal dictates the measure of inequality from one member of a given family to the next member (Lorenz, 1905).
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