Question

3. Income Distribution exercise: The following table shows income distribution data for the US economy in 1977 and 1999. Plot the Lorenz curves for the economy in 1977 and 1999. What do these curves indicate about how income distribution has changed in the US over the past two decades? Calculate the Gini index for the two years. The calculation of the Gini Index is explained in D. Henwood (1993): “The Gini Index” [http:// www.leftbusinessobserver.com/Gini_supplement.html].

                                                                          

                                                                                          Share of Aggregate Income

Household

Group                                                                                 1977                         1999

One-fifth with lowest income                                          5.7%                        4.2%

Next lowest one-fifth                                                       11.5%                        9.7%

Middle one-fifth                                                                              16.4%                      13.4%

Next highest one-fifth                                                     22.8%                      22.6%

One-fifth with highest income                                       43.6%                      50.1%

Answer 1

	Share of income By quintile					Ratios
	Poorest	2nd	3rd	4th	richest	Q5/Q1	Q3/Q1	Q5/Q3
1977	5.70%	11.50%	16.40%	22.80%	43.60%	7.65	2.88	2.66
1999	4.20%	9.70%	13.40%	22.60%	50.10%	11.93	3.19	3.74
Change	-1.50%	-1.80%	-3.00%	-0.20%	6.50%	4.28	0.31	1.08

	Graph Data Cumulative percent
	0	1	2	3	4	5
1977	0.00%	5.70%	17.20%	33.60%	56.40%	100.00%
1999	0.00%	4.20%	13.90%	27.30%	49.90%	100.00%

Lorenz curve: the 1999 curve has become wider from 45⁰ line which indicates that the income gap has increased compared to 1977

Gini Coefficient: The ratio of Q5/Q1 change (4.28) compared with ratio of Q3/Q1 and Q5/Q1 is more which confirms the increase in income gap between rich and poor.