Income inequality
We measure income inequality within countries using the 90/10 ratio:
• Average income of top 10% / Average income of bottom 10%
• 90th percentile / 10th percentile
• The problem is that we do not consider the middle bracket.
We measure standard of living between countries using:
1. GDP per capita
• GDP / Population
• GDP is the total value of final goods and services produced in a
country in a time period.
• We use per capita because we cannot just compare GDP due to
differences in the population sizes of countries.
• The problem is that GDP per capita does not include all aspects
relevant to well-being. E.g. Pollution, crime, etc.
• This is best for overall well-being. It includes income people earn and
all other spending by the government (i.e. public goods and services).
2. Disposable income per capita
• Disposable income / Population
• Same as average disposable income.
• Disposable income = Sum of income (wages, rent, profit, interest) –
Sum of transfers to the government (taxes) + Sum of transfers from
the government (grants, subsidies).
• This is best for the living standard of people in the country (at home).
There is a larger difference between 1 and 2 if taxes are higher and the
government provides more public goods. 1 > 2, since tax is deduced.
We measure income inequality within countries using the 90/10 ratio:
• Average income of top 10% / Average income of bottom 10%
• 90th percentile / 10th percentile
• The problem is that we do not consider the middle bracket.
We measure standard of living between countries using:
1. GDP per capita
• GDP / Population
• GDP is the total value of final goods and services produced in a
country in a time period.
• We use per capita because we cannot just compare GDP due to
differences in the population sizes of countries.
• The problem is that GDP per capita does not include all aspects
relevant to well-being. E.g. Pollution, crime, etc.
• This is best for overall well-being. It includes income people earn and
all other spending by the government (i.e. public goods and services).
2. Disposable income per capita
• Disposable income / Population
• Same as average disposable income.
• Disposable income = Sum of income (wages, rent, profit, interest) –
Sum of transfers to the government (taxes) + Sum of transfers from
the government (grants, subsidies).
• This is best for the living standard of people in the country (at home).
There is a larger difference between 1 and 2 if taxes are higher and the
government provides more public goods. 1 > 2, since tax is deduced.
