Gini Index

And finance Allah shmoop What is income distribution All right

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

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

in a country and or around the world But normally

the way we look ATT income distribution is to divide

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

then we can look at how much of the total

GDP pie each of those equal groups of people is

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

an equal distribution of income The more unequal the pie

slices look while the more unequal income distribution is those

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

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

economics which are called normative statements many people think that

the more unequal income distribution is the less fair it

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

idea that extreme income inequality can actually be bad for

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

depends how you define the economy Economist have come up

with a genius tool for making measuring income distribution as

easy as pie and well actually even better than a

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

coefficient These things right here if a nation was perfectly

equal it would be a straight diagonal line like this

If you look at the X and Y axes well

this makes sense The X axis is the buckets of

people in the Y Axis is the percent of money

to be spread among them on a straight line The

bottom ten percent of people are getting well ten percent

of the money The bottom fifty percent of people are

getting fifty percent of the money in the bottom ninety

year getting ninety percent right The more saggy the line

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

Well for instance as income distribution has become less and

less equal in recent decades sort of depending on how

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

Sagheer and saggy er just like your skin will one

day Sadly trust us in this graph Using data from

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

Denmark in Hungary two of the countries with some of

the most equitable income distribution with Namibia one of the

least equitable The first line below the blue one is

Denmark In the second between the yellow silver and red

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

See how saggy Namibia is Well if you look at

the bottom eighty percent of the people the four on

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

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

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

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

look at the Gini coefficient Well the Gini Coefficient takes

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

number You know like a jet I take a look

at this graph The more sag there is to our

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

smaller the B area gets the Gini coefficient is a

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

our perfectly equal straight line well then the area is

zero making our Gini coefficient also zero But what if

the saggy sag sags all the way down to the

X axis which means income is distributed really really unequally

Well that would make the Gini coefficient one right Gini

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

between zero and one sometimes expressed as a decimal or

a percentage the closer to zero The more equal the

income distribution in the closer the one the less equal

Well the Gini Coefficient takes all those numbers the stilling

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

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

good to remember these air more estimates than actual numbers

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

international politicking and all the other crap that goes behind

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

been sagging as time goes by at least in the

modern era with income distribution getting less and less equal

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

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

How do they work Well there are progressive taxes and

regressive taxes Progressive taxation is where you pay a higher

percentage in taxes The more money you make For instance

in the country of United Simpleton Sze Everyone pays ten

percent on their first twenty grand than twenty percent on

their next eighty and then fifty percent on any income

over one hundred grand Well these different buckets are called

tax brackets and under this quote progressive unquote tax system

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

ten percent on his first twenty grand of income and

twenty percent on his last ten thousand of income That

leaves Billy Bob with twenty six grand to live on

Well then he have Joe Schmoe who makes one point

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

first twenty grand twenty on his next eighty and fifty

percent on his remaining one point four million That leaves

Joe Schmo with seven hundred eighty two thousand dollars to

live on A regressive tax also known as a flat

tax is where all income is taxed at the same

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

regressive tax since it takes a more meaningful percentage of

income from low income people compared to high income people

to pay those taxes For instance if the united simple

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

Well that would leave Billy Bob with twenty two thousand

five hundred dollars and Joe Schmo with one million one

hundred twenty five thousand dollars Well because there are so

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

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

taxation and social programs and public services are best to

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