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12
THE NATURE & SCOPE OF MACROECONOMICS
Macroeconomics deals with the performance of the economy in aggregate, and the relationships
between broad aggregates of each sector, as opposed to Microeconomics which deals with the
individual unit - whether that unit is a person, a firm or an industry.

A broad simplification would be to say that macroeconomics is the summation of all micro-economies
in the goods, services, factors and financial markets.

Although Microeconomics forms the essential basis for Macroeconomics [and more and more Macro
economists are looking for Micro foundations for Macro theory], some of the explicit assumptions in
Micro theory may not necessarily be valid for Macroeconomic theory,

i.e. Supply = Demand

Assume the Government Levies a 10% Tax on Cans of Tiger………

Microeconomics is concerned with: •• the individual's consumption reaction

•• the individual's loss of utility
•• the producer's production reaction

Macroeconomics is concerned with: •• the over-all effect on consumption expenditure

•• how much revenue will the taxation policy yield
•• how the government should spend that revenue

Obviously Microeconomic principles are a vital foundation for Macroeconomic policies. The
government might tax beer or cigarettes due to their price inelasticity of demand; it won't put a tax on
green shoes!

12.1 The Methodology of Macroeconomics

Macroeconomic theory seeks to explain the structure of an economy, and the way it functions:
Positive Economics [i.e. what is].

Macroeconomic policy is concerned with "fixing" the economy, or altering it in a certain manner:
Normative Economics [i.e. what should be].

Since John Maynard Keynes produced his "General Theory of Employment, Interest and Money" in
1936 [which effectively introduced the whole concept of "Macro" economics], fundamental differences
of opinion have arisen amongst economists about the way in which an economy behaves, and what are
the best ways and means to tackle these Macroeconomic problems.

There are now several schools of thought, ranging from one extreme to the other.

The major schools of thought are: Classical (pre 1936); Keynesian (1936 to date) and Neo-Classical
(1957 to date).

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KEYNESIAN

Marxist Extreme Eclectic Post

Keynesians Keynesians Keynesians Keynesians
[Neo Keynesians]

NEO-CLASSICAL

Gradual The Supply-Side Rational

Monetarists Austrians Economists Expectationists

12.2 Assessment of the Competence of Macroeconomic Polices

Macroeconomic policy can be assessed by means of monitoring the following economic variables:

1. Unemployment
2. Inflation
3. Economic Growth
4. Balance of Payments
5. Regional Balance

Different countries, and different political parties within those countries, will rank these in differing
orders of importance. [So does the British government, depending upon which variables are looking
healthy at any given time!]

12.3 Gross National Income

Gross National Income is the summation of all factor incomes in an economy in any given time period
[normally a year].

i.e. GNI = Σ(wages, rent, interest, profit)

It includes all incomes earned by domestically owned factors of production, but excludes all transfer
payments.

So, Singapore's GNI includes income earned by everyone in this room, including dividends on shares
you might own in American companies in the U. S. A., or rent on a property you own in Malaysia,
i.e. it does not relate exclusively to income earned in Singapore.

12.4 Gross Domestic Product

Gross Domestic Product is the value of all final goods and services produced in an economy in any
given time period [normally a year].

The "final" is vital, so as to avoid double counting. At each stage of manufacturing a good, only the
value added to that good at that stage of manufacture is counted as part of GDP.

i.e. if a company sold integrated circuits to a computer manufacturer for $2 million, and the
computers produced were sold for $3 million, only $1 million has been added to GDP by the
computer company -

$3 million - $2 million = $1 million

The output of a Japanese company based in Singapore is included in Singapore's GDP, but the output
of a Singapore company based in Malaysia isn't included in Singapore's GDP.

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12.5 Gross National Product

Gross National Product is the value of all final goods and services produced by domestically owned
factors of production in any given time period [normally a year].

i.e. GNP = GDP + factor income from abroad

The output of a British owned firm in Singapore is included in the UK's GNP, but not in the UK's GDP. It
is included in Singapore's GDP. International comparisons are thus normally made using GDP data so
as to avoid double counting.

GNP vs. GNI

In theory, Gross National Income should be equal to Gross National Product

- that is, the summation of all output by domestically owned factors of production should equate
to the income derived from those factors of production.

In practice, however, GNP > GNI by between 3% and 5% in the UK - and up to 20% in certain
European economies like Italy - due to tax evasion.

It is easier to measure output than income. People are more willing to tell the truth about what they
spend rather than about what they earn!!!!

••• GDP AT MARKET PRICES

GDP at market prices measures domestic output inclusive of indirect taxes on goods and services.
The market price of a good, which includes G.S.T. and any sales tax, is not the amount of net revenue
received by the producer.

••• GDP AT FACTOR COST

GDP at Factor Cost measures domestic output exclusive of indirect taxes on goods and services -
i.e. - the net amount actually received by the factors of production which manufactured the good.

••• GNP AT MARKET PRICES

GNP at market prices measures output owned by domestic factors of production, no matter where
their location is, inclusive of indirect taxes on goods and services.

••• GNP AT FACTOR COST

GNP at Factor Cost measures output owned by domestic factors of production, no matter where
their location is, exclusive of indirect taxes on goods and services. GNP at Factor Cost is also
referred to at Net National Product.

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12.6 National Income Accounts Summary

Net
Income
from
abroad
Gross
National
Product
at Gross
Market Domestic GNP = GDP + Net Income from abroad
Prices Product
at
Market
Prices

GNP at Factor Cost = GDP at Factor Cost =

GNP at Market Prices − GDP at Market Prices −
Indirect Taxation Indirect Taxation
Indirect Net
Taxation Income
from
abroad
Gross
National
Product
at Indirect
Market Gross Taxation
Gross
Prices National Domestic
Product Product
at at Gross
Factor Market Domestic
Cost Prices Product
at
Factor
Cost

It is actually GNP at Factor Cost which we will be dealing with this year – but we won’t call it that.
Because what one person spends is what somebody else earns, we can measure income – and hence
output – by measuring spending. Spending in an economy can be broken down into a few major
components:

•• Consumption Expenditure - which is all spending by individuals (on clothes, food, housing,
holidays, books, trips to the cinema, etc., etc.)

•• Investment Expenditure - which is all spending by firms on capital equipment which leads
to the production of consumption goods

•• Government Expenditure - which is a mixture of Consumption and Investment spending

•• EXport Expenditure - which is spending in our economy by foreigners – also a

mixture of Consumption and Investment spending

and from all of this we should subtract:

•• IMport Expenditure - which is spending by our citizens on foreign goods and services
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So, total spending in an economy equals: SPENDING = C + I + G + X - M

and because we buy what is produced, this means: OUTPUT = C + I + G + X - M

and because what we spend is someone else’s income,

this means: INCOME = C + I + G + X - M

X-M Net Exports [i.e. Exports less Imports]

G Government Expenditure
Gross National
National Income
Product I Investment Expenditure
at
Factor
Cost Y
C Consumption Expenditure

Y = C + I + G + (X − M)

where: Y is National Income

C is Consumption Expenditure
I is Investment Expenditure
G is Government Expenditure
X is Exports
M is Imports

Or, if you prefer an accountant’s approach:

NATIONAL INCOME ACCOUNTS

Output/Expenditure $m Income $m
Consumption spending 150 Wages 135
Investment spending 30 Rent 20
Government spending 60 Profit 45
Spending on Exports
less spending on imports 10
GDP AT MARKET PRICES 250 NET NATIONAL INCOME 200
Factor Income from abroad 10 Factor Income from abroad 10
GNP AT MARKET PRICES 260 GROSS NATIONAL INCOME 210
Less: Indirect taxation (50)
GNP AT FACTOR COST 210
Less: Depreciation (20) Less: Depreciation (20)
NATIONAL INCOME 190 NATIONAL INCOME 190
AT FACTOR COST AT FACTOR COST

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THE WORLD ECONOMY:

THE FIFTY BIGGEST ECONOMIES IN 2013
RANKED BY GDP IN US$ billion

(accurate as at Saturday 30 November 2013)

1. United States 15,998.445 26. Taiwan 492.290

2. China 8,802.930 27. Belgium 489.539

3. Japan 6,023.609 28. Austria 406.569

4. Germany 3,502.596 29. South Africa 395.844

5. France 2,634.786 30. Venezuela 393.897

6. Brazil 2,515.766 31 Thailand 380.186

7. United Kingdom 2,464.910 32. Colombia 377.001

8. Russia 2,123.058 33. United Arab Emirates 373.298

9. Italy 2,034.219 34. Denmark 321.478

10. India 1,906.949 35. Malaysia 318.703

11. Canada 1,873.653 36. Singapore 284.816

12. Australia 1,588.050 37. Nigeria 279.456

13. Spain 1,365.577 38. Chile 277.563

14. Mexico 1,235.970 39. Hong Kong 272.227

15. South Korea 1,213.665 40. Egypt 265.715

16. Indonesia 922.108 41. Philippines 259.201

17. Turkey 834.191 42. Finland 255.129

18. Netherlands 792.444 43. Israel 248.121

19. Saudi Arabia 745.490 44. Greece 246.709

20. Switzerland 648.210 45. Pakistan 237,676

21 Iran 562.617 46. Iraq 218.876

22. Sweden 539.347 47. Algeria 215.067

23. Norway 521.145 48. Portugal 213.784

24. Poland 507.181 49. Ireland 212.520

25. Argentina 498.702 50. Peru 205.968

Footnote: In 2013 China accounts for only about 10% of World GDP

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THE WORLD ECONOMY:

THE FIFTY BIGGEST ECONOMIES IN 2038
RANKED BY GDP IN US$ bn

[Projected GDP in 2038, US$ bn; assuming the same average annual growth rate as 1982-2012,
excluding the financial crisis of 2008/2009]

1. China 85,109.9 26. Norway 1,389.3

2. United States 33,497.2 27. Malaysia 1,215.3

3. Brazil 10,797.3 28. Argentina 1,178.6

4. India 9,206.2 29. Kazakhstan 1,103.4

5. Germany 8,277.5 30. Sweden 999.9

6. Japan 7,882.4 31 United Arab Emirates 995.2

7. Mexico 6,708.1 32. Kuwait 974.2

8. South Korea 6,587.1 33. Iraq 939.4

9. Russia 5,659.7 34. South Africa 935.5

10. Indonesia 5,004.7 35. Venezuela 930.9

11. United Kingdom 4,569.8 36. Hong Kong 921,9

12. Canada 4,427.1 37. Colombia 890.9

13. France 4,322.6 38. Austria 851.3

14. Australia 3,752.9 39. Qatar 814.6

15. Italy 3,337.3 40. Belgium 803.1

16. Turkey 3,181.1 41. Philippines 691.0

17. Spain 2,531.7 42. Israel 661.5

18. Taiwan 2,379.7 43. Chile 655.9

19. Poland 1,934.1 44. Algeria 646.4

20. Iran 1,905.2 45. Ireland 638.7

21 Thailand 1,835.4 46. Czech Republic 601.1

22. Saudi Arabia 1,761.8 47. Denmark 596.0

23. Singapore 1,736.9 48. Nigeria 585.1

24. Netherlands 1,659.2 49. New Zealand 574,6

25. Switzerland 1,531.9 50. Romania 573.6

Footnote: If these projections are correct, in 2038 China will account for about 25% of World GDP

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THE WORLD ECONOMY:

THE FIFTY BIGGEST ECONOMIES IN 2113
RANKED BY GDP IN US$ bn

[Projected GDP a century from now, US$ bn; assuming the same average annual growth rate as
1982-2012, excluding the financial crisis of 2008/2009]

1. China 27,337,693.0 26. Qatar 31,632.0

2. Indonesia 800,128.0 27. Norway 26,320.0

3. India 740,519.0 28. Iraq 25,502.0

4. South Korea 520,754.0 29. Saudi Arabia 23,253.0

5. Brazil 419.290.0 30. France 22,935.0

6. Singapore 277,689.0 31 Angola 15,612.0

7. Mexico 260,495.0 32. Netherlands 15,230.0

8. Turkey 254,880.0 33. Italy 14,737.0

9. United States 213,451.0 34. Philippines 13,091.0

10. Taiwan 188,133.0 35. Chile 12,427.0

11. Germany 190,250.0 36. Colombia 11,759.0

12. Thailand 101,782.0 37. Switzerland 11,718.0

13. Canada 83,888.0 38. Spain 11,180.0

14. Vietnam 74,751.0 39. New Zealand 10,886.0

15. Iran 73,985.0 40. Argentina 9,350.0

16. Australia 71,100.0 41. Israel 8,730.0

17. Malaysia 67,396.0 42. Venezuela 8,544.0

18. Poland 52,504.0 43. Ireland 8,430.0

19. Russia 51,915.0 44. Czech Republic 7,933.0

20. Hong Kong 51,120.0 45. Nigeria 7,722.0

21 Japan 50,228.0 46. South Africa 7,698.0

22. Kazakhstan 42,846.0 47. Sweden 7,110.0

23. United Arab Emirates 40,653.0 48. Ukraine 6,900.0

24. Kuwait 38,644.0 49. Peru 6,424.0

25. United Kingdom 37,830.0 50. Algeria 5,932.0

Footnote: If these projections are correct, in 2110 China will account for 92.5% of World GDP

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12.7 Difficulties in Calculation of and Comparison of GNP & GDP

•• Double Counting
− only finished goods must be counted, not intermediates
− sales less imports

•• Goods and Services not sold on the market

− goods produced for one's own consumption are not included in the nation's GDP
figures - i.e. painting the interior of your flat, or collecting stamps, or any other activity
which does not reach the market
− the work done by housewives is not included in GDP

GDP and GNP are measures of economic activities which enter the market, and are recorded by the
government (mainly for taxation purposes).

The comparison between GDP figures for Japan and, say Bangladesh is thus to a certain extent invalid:
it merely exaggerates the differences between rich and poor countries.

In Zimbabwe in 1986, it was estimated that only 23% of economic activity was actually captured by
government statistics - and Zimbabwe was then one of the three most advanced economies in sub-
Saharan Africa!

12.8 Economic Growth

Economic growth is measured by the real growth in Gross Domestic Product. Real growth is
nominal growth discounted by the rate of inflation.

Let's say that the Republic of Bongoland had GDP of $1,000 million in 2006, and has GDP of $1,200
in 2007. Nominal economic growth is 20%.

But if inflation in Bongoland was 15% between 2006 and 2007, real economic growth is:

1 + 20%
−1 × 100% = 4.35%
1 + 15%

12.9 Measuring Inflation

Different countries have different means of measuring the rate of inflation - which makes international
inter-comparison even more difficult. All O.E.C.D. countries, however, use a means accepted by the
I.M.F. as truly representative:

An Ideal Fischer Price Index, which is a combination of a Laspères Price Index and a Paasche Price
Index.
The Laspères price index is calculated: The Paasche price index is calculated:
Sj = n Sj = n
p1j q0j
Σ
Sj = 1
Σ p1 q1
Sj = 1
j j

Lp = Sj = n
× 100 Pp = Sj = n × 100
p0j q0j p0j q1j
Σ
Sj = 1
Σ
Sj = 1

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The Laspères is a base-weighted index. The Paasche is a current-weighted index.

where: p = price
q = quantity
0 = time period 0 (previous period)
1 = time period 1 (current period)

Elementary example:
2009 2010 2009 2010
price price quantity quantity

Tiger $6.00 $6.50 8 7

Dunhill $11.60 $11.80 5 6

[(6.50 × 8) + (11.80 × 5)]

Lp = x 100 = 104.7169
[(6.00 × 8) + (11.60 × 5)]

Measured by the Laspèyres index, the cost of living has risen by 4.7%. If incomes have not risen, the
standard of living has fallen by 4.5% (4.7 as a fraction of 104.7).

[(6.50 × 7) + (11.80 × 6)]

Pp = x 100 = 104.4215
[(6.00 × 7) + (11.60 × 6)]

Measured by the Paasche index, the cost of living has risen by 4.42%. If incomes have not risen, the
standard of living has fallen by 4.2% (4.42 as a fraction of 104.42).

12.10 GDP at Constant 2013 Prices: The GDP Deflator

When looking at economic growth over a period of time in an economy, it is useful to change the base
such that real growth can easily be recognised.

It is meaningless to quote nominal GDP figures for 1983, 1993, 2003 and 2013 when there would
have been inflation during those 30 years, inflation which would, moreover, have varied at different
times over the three decades.

It is useful to deflate or inflate nominal GDP figures according to the retail price index, thereby getting
a string of data at "constant 2009 prices" as opposed to "at current prices".

2010 2011 2012 2013

$bn $bn $bn $bn

Nominal GDP 1,000 1,100 1,250 1,425

Economic Growth 10.0% 13.6% 14.0%
Inflation 7% 9% 8%
Real Economic Growth 2.8% 4.2% 5.6%

REAL GDP:
• Constant 2009 prices 1,000 1,028 1,071 1,131
• Constant 2010 prices 1,069 1,100 1,146 1,210
• Constant 2011 prices 1,164 1,198 1,250 1,320
• Constant 2012 prices 1,253 1,289 1,345 1,425
GDP Deflator (2013) 87.9 90.4 94.4 100.0
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12.11 GNP and GDP Per Capita

Obviously a country like China will have a bigger economy than a country like Singapore, given that
China's population is about 300 times bigger than Singapore's.

What is more significant when comparing countries' economies, therefore, is the GNP per capita or
the GDP per capita (i.e. GNP or GDP per person) rather than simply a comparison of GNP or GDP.

GNP
GNP per capita is:
POPULATION

GDP figures and GDP per capita figures are normally quoted in US $ terms for international
comparison. What is far more meaningful than the mere size of an economy is the relative richness of
the average individual within that society – the GNP per capita.

THE WORLD ECONOMY:

THE FIFTY RICHEST COUNTRIES ON EARTH

GDP PER CAPITA IN US$ (accurate as at 30 November 2013)

1. Liechtenstein 151,869 26. France 37,309

2. Bermuda 124,705 27. Japan 36,945
3. Qatar 95,951 28. The Bahamas 34,920
4. Luxembourg 67,410 29. Ireland 34,656
5. Macau 65,456 30. New Zealand 34,090
6. Singapore 64,669 31 Italy 33,657
7. Andorra 63,521 32. Spain 33,220
8. Norway 62,830 33. South Korea 33,077
9. Kuwait 61,739 34. Iceland 32,918
10. Brunei 59,062 35. Cyprus 32,159
11. Hong Kong 56,767 36. Oman 29,004
12. Switzerland 55,053 37. Israel 28,952
13. United Arab Emirates 53,163 38. Slovenia 28,761
14. United States 50,865 39. Seychelles 26,862
15. Netherlands 45,538 40. Trinidad and Tobago 26,459
16. Taiwan 45,187 41. Saudi Arabia 26,385
17. Sweden 44,061 42. Malta 26,162
18. Denmark 44,040 43. Equatorial Guinea 25,578
19. Austria 43,666 44. Czech Republic 25,167
20. Germany 42,616 45. Greece 25,009
21 Australia 42,341 46. Portugal 24,776
22. Canada 42,256 47. Slovakia 23,987
23. Belgium 40,888 48. Estonia 22,565
24. Finland 39,525 49. Bahrain 22,534
25. United Kingdom 37,341 50. Poland 21,695

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12.12 Purchasing Power Parity

Although more meaningful that GDP figures, GDP per capita statistics do not necessarily paint a true
picture because of the different cost of living in different countries.

For example, a Big Mac may cost S $3.40 in Singapore, but costs the Singaporean equivalent of
S$7.00 in ¥ in Tokyo. Thus a Japanese fast food freak is less well off than his Singaporean
counterpart, even if he earns twice the salary.

On the other hand, a brand new Mercedes 200 costs S$ 400,000 here, but in the UK costs less than
S$ 75,000. A Singaporean thus has to be earning 5.333’ times more here than in the UK to give him
the same standard of living as the UK.

I was in Bermuda in August 2012, staying with a friend of my sister’s. On my last evening there, I took
my host out for a simple meal: pizza. Not an expensive place like Pizza Hut – just a simple family
restaurant. Three people: two pizzas, one spaghetti, one bottle of red wine and two deserts. The bill:
US$350.

There is a girl from China, now in Year 2 (DE last year). I was walking along with her in Clementi Mall
just before Chinese New Year. She said: “everything here has the same nominal price as in China”.
We were passing a little store selling phone-covers. What she meant was that something that cost
$20 here costs 20 RMB in China. Something that costs $5 here costs 5 RMB in China. The thing is,
at the stage there were 5 Yuan to one Singapore dollar.

A way of getting around this is to adjust GDP figures for purchasing power parity.

The I. M. F. came up with a purchasing power parity deflator in 1993, which is now updated on a
monthly basis in their International Financial Statistics. It monitors the cost of a typical bundle of goods
in all nations, and then adjusts the per capita GDP statistics for the purchasing power of those figures.

The Economist does it’s own “Purchasing Power Parity” table every year, done on the price of a Big
Mac in 25 different countries. What started as a joke about 31 years ago is now quite a serious
exercise: it gives very powerful predictions as to future currency fluctuations!

It takes the USA as its base line, and then sees the cost of living varies in other countries. If something
which costs US$10 in the United States costs, say, the equivalent of US$20 in Japan, then Japanese
GDP per capita figures are divided by 2 to give a more realistic indication of how “rich” Japanese
people are, on average.

Japanese people might earn a lot more money than others, but if their cost of living is much higher,
then in real terms – in terms of purchasing power – they are not richer.

If something which costs US$10 in the US costs, say, the equivalent of $2.50 in China, then Chinese
GDP per capita figures are multiplied by 4 to give a more realistic indication of how “rich” Chinese
people are, on average.

Chinese salaries might be lower than those in Singapore, but if prices of food, accommodation and
transport are much lower, Chinese people could be richer than Singaporeans in terms of how many
goods and services their salaries can buy.

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THE FIFTY RICHEST COUNTRIES ON EARTH

GDP PER CAPITA IN US$ at PURCHASING POWER PARITY (as at 30 November 2013)

1. Qatar 102,211 26. United Kingdom 36,941

2. Liechtenstein 98,432 27. Finland 36,395

3. Macau 82,400 28. Japan 36,266

4. Bermuda 81,350 29. France 35,548

5. Luxembourg 79,785 30. Israel 32,312

6. Singapore 60,410 31 South Korea 32,272

7. Norway 55,009 32. The Bahamas 31,382

8. Brunei 54,389 33. Saudi Arabia 31,275

9. Andorra 53.383 34. Spain 30,557

10. Hong Kong 51,494 35. Italy 30,136

11. United States 50,865 36. New Zealand 29,730

12. United Arab Emirates 49,012 37. Oman 29,166

13. Switzerland 45,418 38. Bahrain 28,744

14. Canada 42,734 39. Slovenia 28,195

15. Australia 42,640 40. Czech Republic 27,191

16. Austria 42,409 41. Cyprus 27,086

17. Netherlands 42,194 42. Malta 27,022

18. Ireland 41,921 43. Equatorial Guinea 25,929

19. Sweden 41,191 44. Barbados 25,373

20. Kuwait 39,889 45. Seychelles 25,229

21 Iceland 39,224 46. Greece 24,505

22. Germany 39,028 47. Slovakia 24,249

23. Taiwan 38,749 48. Portugal 23,385

24. Belgium 37,883 49. Estonia 21.713

25. Denmark 37,657 50. Lithuania 21,615

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12.13 Limitations of GDP & GNP Data (whatever their format!)

GDP data, in no matter what format it is presented, does not by itself show the true standard of living
of a nation, either for individual analysis or for international comparison.

•• Data from non O.E.C.D. countries may be inaccurate, thus rendering comparisons
meaningless. Inaccuracies may occur in output figures, inflation estimates or population
growth estimates.

•• GDP figures exclude time expenditure on leisure, hence underestimating the growth of
welfare in a country.

•• GDP data does not show anything about the distribution of income in a society. It merely
shows a mathematical mean which may be totally unrepresentative.

Iran in 1978 - a year before the revolution - had GDP per capita of US$ 6,000 - very
respectable, considering the US equivalent at the time was $13,000, and Germany $10,500.

But this raw data hid the fact that 99% of the wealth was held by 2% of the population: for
the remaining population, true income per annum was probably less than $500.

In February 1990 when Nelson Mandela was released from prison, GDP per capita in South
Africa was US$ 4,250 - the highest in Africa (neighbouring Mozambique's was US$ 120).

However, the average annual incomes of the 4 million white people exceeded US$ 30,000,
(that's S$43,200) while the average annual incomes of the 30 million black people was less
than $ 850.

The Lorenz Curve

The Lorenz curve shows the distribution of income in a society, by plotting cumulative percentage of
income received in the economy against the cumulative percentage of income recipients. It thus
gives a far clearer indication of the level of equitable welfare in an economy or nation.

Cumulative 100%
Percentage
of
Income
Received

0% 100%
Cumulative Percentage
of
Income Recipients

The closer the curve is to the diagonal (which would imply an exactly equal distribution of income), the
"fairer" is the share of wealth.
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Obviously, the more "bowed" the Lorenz curve is, the more inequitable is the distribution of income in
an economy.

A country like Sweden:

Cumulative 100%
Percentage
of
Income
Received

0% 100%
Cumulative Percentage
of
Income Recipients

…… has a very flat Lorenz Curve, which means that income is fairly evenly distributed.

Whereas a country like South Africa:

Cumulative 100%
Percentage
of
Income
Received

0% 100%
Cumulative Percentage
of
Income Recipients

…… has a very bowed Lorenz Curve, which means that income is not evenly distributed.

[If you ever have to look for a Gini coefficient, the Lorenz curve is a good place to start your hunt…….]

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