3.4 Economics of inequality and poverty

• Equality and equity are related but distinct concepts

• Equity involves fairness and may require normative judgment

• Economic inequality includes unequal distribution of income

• Economic inequality also includes unequal distribution of wealth

• Lorenz curve and Gini coefficient measure income distribution

• Diagram: Lorenz curve showing income distribution and changes in distribution

• Absolute poverty differs from relative poverty

• Poverty can be measured using international poverty lines and minimum income standards

• Composite measures include the Multidimensional Poverty Index

• Measuring poverty has practical and conceptual difficulties

• Causes include unequal opportunity, resource ownership, human capital, discrimination, status, and power

• Government tax and benefit policies can affect inequality and poverty

• Globalisation, technological change, and market-based supply-side policies can affect inequality and poverty

• Income and wealth inequality affect economic growth

• Inequality affects standards of living and social stability

• Progressive, regressive, and proportional taxes affect distribution differently

• Average and marginal tax rates are used to analyse tax burdens

• Direct taxes include personal income, corporate income, and wealth taxes

• Indirect taxes affect expenditure and can be regressive

• Policies include investment in human capital and reducing inequality of opportunity

• Transfer payments, targeted spending, universal basic income, anti-discrimination policies, and minimum wages can reduce poverty or inequality

• Construct a Lorenz curve from income quintile data

• Calculate indirect tax paid from a tax rate and expenditure level

• Calculate total tax and average tax rates from data