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By the end of this topic, you should be able to:
Income is the money a person earns or receives over a period of time. Think of it like water flowing through a pipe — it keeps coming in regularly.
Examples of income include:
The key idea is that income is measured over a time period — for example, "I earn 2,000 dollars per month." It is called a flow because, just like a river, it keeps moving and being received continuously.
Wealth is the total value of everything a person owns and has accumulated at a particular point in time. Think of it like water stored in a tank — it has built up over time and just sits there.
Examples of wealth include:
Wealth is called a stock because it is measured at one moment in time — for example, "I own assets worth 500,000 dollars today."
Income and wealth are connected. If someone earns a high income over many years and saves or invests some of it, they will build up more wealth. So income inequality today can lead to wealth inequality in the future. People with more wealth also tend to earn more income from it (e.g. rent from properties, dividends from shares), which makes the gap between rich and poor even wider over time.
Inequality means that income and wealth are not shared equally among people in society. There is a large gap between the richest and the poorest.
To understand the Gini coefficient, you first need to understand the Lorenz curve — a graph that shows how income (or wealth) is actually distributed in a country.
There is also a line of perfect equality — a straight diagonal line at 45 degrees. This line shows what income distribution would look like if everyone in the country earned exactly the same. For example, the poorest 40% of the population would earn exactly 40% of total income.
In reality, the actual Lorenz curve bows below this line. The further it bows downward (away from the 45-degree line), the more unequal the income distribution is.
The Gini coefficient is a single number that tells us how unequal a country's income (or wealth) distribution is. It is based on the Lorenz curve diagram.
You do not need to calculate this yourself in the exam — but you must understand what the number means.
Interpreting the Gini coefficient:
| Gini Coefficient Value | What It Means |
|---|---|
| Close to 0 | Near-perfect equality — everyone earns roughly the same |
| Close to 1 | Extreme inequality — almost all income is held by a tiny few |
| Around 0.3 | Relatively equal distribution (common in developed countries) |
| Around 0.6 | High inequality (common in some developing countries) |
Key rule: The higher the Gini coefficient, the greater the inequality. A country with a Gini of 0.6 is more unequal than a country with a Gini of 0.3.
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