In the graph drawn above, the diagonal line is the line of equal distribution of

Question

In the graph drawn above, the diagonal line is the line of equal distribution of income. The curves. L_1 and L_2 are Lorenz curves, (i) What is measured on the horizontal axis and what is measured on the vertical axis of the graph? (ii) Why is the diagonal regarded as the line of equal distribution of income? (iii) Which Lorenz curve represents greater economic inequality and why? The Lorenz curve measures inequality in person income distribution. What is the difference between personal income distribution and functional income distribution? What is the difference between a proportional tax and a progressive tax? What are the problems of progressive taxation as a means to achieve greater equality in income distribution?

Explanation / Answer

Answer 1:

i. The horizontal Axis measures cumulative share of people form lowest to highest incomes and the vertical axis measures cumulative shares of income earned.

ii. At the diagonal line which is the line of perfect equality, cumulative share of people or population is equal to the cumulative share of the income earned by the people. Thus, it represents line of perfect equality of wealth distribution.

iii. Inequality = Area between the diagonal line and the curve / Area of the entire triangle beneath the diagonal line

Thus, a curve farther away from the diagonal line will represent higher inequality as compared to the curve which is closer to the diagonal line. Thus, L2 represents greater economic inequality as compared to L1.

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