1. Income, Wealth
and the Lorenz Curve

2. income The flow of money to a person or household
Includes wages, rent, interest, profit
Time related (we earn income over a period)

3. So...
What is wealth

4. Wealth is… A stock of assets OWNED by an individual or group
It often includes property and savings
and is measured in dollar terms
It can be defined as our NET WORTH

5. NET WORTH
OWN
OWE
Total Assets XXX
Less: Total Liabilities XX
Net worth XXX

6. The income / wealth relationship
To get wealth, people must give up consumption (ie stop spending some of our income).
Whenever we spend, there is an OPPORTUNITY COST - we give up the opportunity of creating FUTURE income because we have not accumulated current income as wealth.

7. “RICH” and “POOR” INCREASES
So…
IT TAKES MONEY TO MAKE MONEY
Spare income is required
in order to invest in assets
that will generate more income
And since households with more income to begin with
are able to allocate more to these income generating
assets
AND THE GAP BETWEEN
THE RICH GET RICHER
“RICH” and “POOR” INCREASES

8. So…Income is a Flow…. and
………. Wealth is a Store

9. The Lorenz Curve
This shows how EQUALLY income is distributed by HOUSEHOLD. 20 40 60 80
100

10. Both the horizontal and vertical sides = 100%
Lorenz Curve
Steps:
100%
One: We draw a square...
Both the horizontal and
vertical sides = 100%
100%

11. Two. Label the axis Lorenz Curve % of households along the base
100
and % of household
income received on the
vertical axis 80
% of household income
Three. Show an
Equal Income
Distribution
a straight line... 60 40
In other words, 20% of
households... 20
would receive 20% of
household income, and
40% of households would
receive 40% of income etc. 20 40 60 80
100
% of households
richest
poorest

12. The curve sags because there is UNEQUAL DISTRIBUTION
% of households
% of household income 20 40 60 80
100
Lorenz Curve
Steps:
Four: Plot the unequal
distribution curve
END
The curve sags because there is
UNEQUAL DISTRIBUTION
the poorest 20% of households
actually earn LESS than 20%
of the income…and so on
Note that the curve
always begins at the
origin
This is because 0% of
households earn 0% of income
and 100% of households
earn 100% of income
And ends at the top right
corner
ORIGIN
% of households
richest
poorest

13. This line would be impossible
% of household income 20 40 60 80
100
Lorenz Curve
This line would be impossible
% of households
richest
poorest

14. This line would show wealth as wealth is more unequal than income
% of household income 20 40 60 80
100
Lorenz Curve
This line would show wealth
as wealth is more unequal than income
% of households
richest
poorest

15. ASSUMPTIONS
All incomes are declared
2. No “in kind” transfers eg Salvation Army food banks or free medical care
The Lorenz curve therefore understates the share of incomes going to lower-income households that benefit from these transfers
3. All households are the same size

16. LIMITATIONS
The actual make-up of households is changing over time
2. The curve shows the gap between high and low income earners but does not show changes in the REAL level of income earned by each group
3. Some people in the low income quintiles may be there temporarily with expectations of higher incomes in the future (eg university students)
4. The curve does not show the equality of OPPORTUNITY to move to other income levels

17. the Liddle Production House
The end
the Liddle Production House