Glossary
Gini Coefficient
A numerical measure of income inequality derived from the Lorenz curve, ranging from 0 (perfect equality) to 1 (perfect inequality).
Example:
A country with a Gini Coefficient of 0.3 is generally considered to have a more equitable income distribution than a country with a coefficient of 0.6.
Income Inequality
A measure of how annual earnings are distributed among different individuals or households within a population.
Example:
If the top 10% of a country's population earns 50% of the total annual income, this indicates significant income inequality.
Lorenz Curve
A graphical representation used to illustrate income or wealth distribution, plotting the cumulative percentage of income against the cumulative percentage of the population.
Example:
A Lorenz Curve that sags significantly far from the line of perfect equality visually demonstrates a high degree of income disparity in a society.
Market Failure
A situation in which the free market fails to allocate resources efficiently, leading to a suboptimal outcome for society.
Example:
When significant income inequality persists due to factors like imperfect information or lack of access to education, it can be considered a form of market failure that the government might try to address.
Progressive Taxes
A tax system where the tax rate increases as the taxable income increases, meaning higher-income individuals pay a larger percentage of their income in taxes.
Example:
Many national income tax systems are designed as progressive taxes, where individuals earning more money face higher marginal tax rates.
Proportional Taxes
A tax system where all income groups pay the same percentage of their income in taxes, regardless of their income level.
Example:
If a local government imposes a flat 2% income tax on everyone, regardless of how much they earn, this would be an example of proportional taxes.
Regressive Taxes
A tax system where the tax rate decreases as the taxable income increases, meaning lower-income individuals pay a larger percentage of their income in taxes.
Example:
A sales tax on essential goods can be a regressive tax because lower-income households spend a larger proportion of their earnings on these goods, making the tax burden disproportionately higher for them.
Transfer payments
Government payments to individuals or businesses for which no goods or services are directly received in return, often used to redistribute income or provide social welfare.
Example:
Social Security benefits and unemployment insurance are common examples of transfer payments aimed at providing a safety net and reducing poverty.
Wealth Inequality
A measure of how assets, such as property, stocks, and savings, are distributed among different individuals or households within a population.
Example:
When a small fraction of households owns the vast majority of a nation's real estate and financial investments, it highlights severe wealth inequality.