Module 3: Income Distribution

One of the significant applications to this topic of getting the area between two
curves is determining the distribution of wealth in a society.
The Lorenz curve is used for measuring inequalities in the distribution of
wealth. It provides a quick, visual illustration of what percentage of a society
receives what percentage of that society’s wealth.
A typical Lorenz curve y = L(x) is shown in the figure below, where the
function L(x) measures the proportion of annual national income received by the
lowest (100x)% of the population for 0 ≤ x ≤ 1.

The variable x represents the cumulative percentage of families at or below a

given income level.
The variable y represents the cumulative percentage of total family income
received.

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Example 5.
The U.S. Census Bureau compiles and analyzes large amounts of data regarding
how income is distributed among families in the U.S. The graph and table below
give a detailed picture of the distribution of family income in 2014. (Source: U.S.
Census Bureau)

Income Level x y
Under $21,000 0.20 0.03
Under $41,000 0.40 0.11
Under $68,000 0.60 0.26
Under $112,000 0.80 0.49
• The point (0.40, 0.11) in the graph indicates that the bottom 40% of families
(income below $39,000) received 11% of the total income for all families in
2014.

• The table shows that in 2014, the Bureau reported that the lowest 20% of
families received 3% of all family income and the top 20% received 51%.

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Absolute equality of income would occur if the area between the Lorenz curve
and y = x were 0.
In this case, the equation for the Lorenz curve would be y = x and all families
would receive equal shares of the total income.
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The maximum possible area between a Lorenz curve and the line y = x is , in
2
which case, there would be absolute inequality of income where all income would
be in the hands of one family with the rest having none.
Lorenz curves lie between these two extremes.
As the shaded area increases, the inequality of income distribution increases.

Gini Index
The Gini index is a single number used to measure income distribution. The
Gini index is the ratio of the area between y = x and the Lorenz curve, and the
area between y = x, the x-axis, from x = 0 to x = 1. The area between the Lorenz
curve and y = x is Z 1
[x − f (x)]dx
0
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The area of the triangle below y = x is .
2
If y = f (x) is the equation of a Lorenz curve, then

Z 1
[x − f (x)]dx Z 1
0
GIni Index = =2 [x − f (x)]dx
1/2 0

.
The Gini index is always a number between 0 and 1:

• A Gini index of 0 indicates absolute equality where all people share equally
in the income.

• A Gini index of 1 indicates absolute inequality where one person or entity

has all of the income and the rest have none.

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 • The smaller the index, that is, if the number is closer to 0, the more equitable
the distribution of wealth. The larger the index, that is, if the number is
closer to 1, the more the wealth is concentrated in only a few entities.

Example 6.
The Lorenz curve for the distribution of income in a certain country in 2017 is
given by the function f (x) = x2.6 . Economists predict that the Lorenz curve for
the year 2030 will be given by the function g(x) = x1.8 . The graphs of the two
curves are shown below:

Find the Gini Index of income concentration for each given Lorenz curve and
interpret the results.
Solution
The Gini Index in 2017:

Z 1 Z 1
2 [x − f (x)]dx = 2 [x − x2.6 ]dx
0 0
 1
1 2 1 3.6 
=2 x − x
2 3.6 
0
 
1 1
=2 − ≈ 0.444
2 3.6

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The Gini Index in 2030:

Z 1 Z 1
2 [x − g(x)]dx = 2 [x − x1.8 ]dx
0 0
 1
1 2 1 2.8 
=2 x − x
2 2.8 
0
 
1 1
=2 − ≈ 0.286
2 2.8
With the Gini Index in 2017 of 0.444 and a Gini index in 2030 projected to be
0.286, the decrease in the Gini index suggests that income will be more equally
distributed in the year 2030 than in 2017.

Example 7
A government agency determines that the Lorenz curves for the distribution of
income for dentists and contractors in a certain state are given by the functions

f (x) = x1.7 and g(x) = 0.8x2 + 0.2x,

respectively. For which job is the distribution of income more fairly distributed?
Solution

The Gini index for dentists:

Z 1 Z 1
2 [x − g(x)]dx = 2 [x − x1.7 ]dx
0 0
 1
1 2 1 2.7 
=2 x − x
2 2.7 
0
 
1 1
=2 − ≈ 0.259
2 2.7
The Gini index for contractors:
Z 1 Z 1
2 [x − g(x)]dx = 2 [x − (0.8x2 + 0.2x]dx
0 0

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   1
1 2 0.8 3 0.2 2 
=2 x − x + x 
2 3 2 
0
  
1 0.8 0.2
=2 − + ≈ 0.267
2 3 2
The incomes of dentists in this particular state are more evenly distributed
than those of contractors.

Try this.

1. A study reports that in a particular city, the Lorenz curves for the distribu-
tion of incomes for computer engineers and stock brokers are given by the
functions
f (x) = x1.8 and g(x) = 0.75x2 + 0.25x,

respectively. For which profession is the distribution of income more fairly

distributed?

2. A study suggests that the Lorenz curves for the distribution of incomes
between two particular professions are given by the functions

f (x) = 0.7x4 + 0.3x and g(x) = Ax2 + Bx,

respectively. Find A and B so the two distributions are equally fair.

3. Read an article on Lorenz curves and write a paragraph on whether you

think this is a good device for analyzing the distribution of resources. If you
think it is not, explain how you think it could be improved.