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Main content
Current time:0:00Total duration:8:15
AP.MICRO:
POL‑5 (EU)
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POL‑5.A (LO)
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POL‑5.A.1 (EK)
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POL‑5.A.2 (EK)
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POL‑5.B (LO)
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POL‑5.B.1 (EK)
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POL‑5.B.2 (EK)

Video transcript

in this video we're going to discuss income inequality which is something that is often debated thinking about comparing countries thinking about whether it's an issue or not and how to address it and to appreciate what income inequality is let's imagine two different countries let's imagine first country a and there's two people in country a so you have person one here who makes $1000 a year that's their income and then there's person two in country a that makes 99 thousand dollars a year so what is going to be the average income in country a if these are the only two people you could think of it as the per capita national income well the average income here average income to figure that out you would just have to average the 1000 and the 99 thousand so you have a total income of one plus ninety-nine a hundred thousand and divided by two folks we're going to have an average income of $50,000 per year now let me construct another country that has the same average income but the distribution is very different so in country B let's say the first citizen of country B they make $50,000 a year and let's say there's a second person in country B and they also make $50,000 per year per year well what's the average income now well this is even easier to compute 50 plus 50 divided by 2 your average income is $50,000 per year so what you see here is two countries that if you just looked at the average income they seemed similarly wealthy but that doesn't give you they seem to have similar average income so you say oh maybe they're similarly prosperous but when you go a step deeper you see that they are very different country a is a lot more unequal than country B when it comes to income so question is is above and beyond looking at things like average income or average GDP or per capita GDP how do you measure inequality and this is something that this Italian statistician Corrado Gini tried to address and he comes up with something called a Gini coefficient to measure income inequality for a nation and the way he approached it is actually pretty intuitive what he did is he sets up two axes so this axis right over here is going to be the cumulative percentage of the population so you start at 0% and then you get all the way to hundred percent of the population so this is the cumulative percent of the population in a country and then on this axis on this axis you have the cumulative percentage of the income in a country so this would be zero down here and then this would be hundred up here and so this is cumulative percent of income in a country and then he said well what would a perfectly equal society look like when a perfectly equal society as you add a percentage on your cumulative percentage of population you should add that exact same percentage to your cumulative percentage of income so as you go up you really should just have a slope of 1 going up like this so one way to think about it is when you're at 0 percent of the population you should have 0 percent of the income if you have a total of 10 percent of the population they should have 10 percent of the national income if you were to go to 50 percent of the population which looks like it's around there if it was perfectly distributed the income well then that should be 50 percent of the national income but no nation is actually there and so then we have to think compare that to the reality so let's say you look at a country and and what you do is when you're looking at the cumulative percentage of the population you start at the left with the lowest income and as you add percentage of the population you get to higher in higher income folks so let's say we're looking at a country that for the poorest folks as you add percentages to the cumulative population you're not adding the same percent to the cumulative income and so it might you might have a curve that looks like this and then as you add percentages in the wealthier population for every 1% you add you're adding more than 1% of national income and so this curve variety over here which you could view is describing the reality for certain nation this is known as a Lorenz curve Lorenz curve and what Jeany said is well the difference between the Lorenz curve and this line right over here that that would be a measure of income inequality and so he would look at this area right over here and say what percentage is this area between this line and the Lorenz curve what percentage is this of this total area under the line and this percentage is called the Gini coefficient and it's typically quoted as being a value from 0 to 1 or sometimes you might see the scale as being from 0 to 100 so what would a Gini coefficient of 0 represent well if you have a Gini coefficient of 0 that means that this area right over here between the Lorenz curve and this line is 0 so that means that we are dealing with a perfectly equal income distribution so at the 0 end this is perfect equality perfect income equality and then what is one or a hundred mean that means that the area between the line and the Lawrence curve is a hundred percent of the area under this line so that would look like something like this a country whose Lorenz curve looks like something like this where all of these people I keep adding more and more and more population but I'm not adding more and more income and then all of a sudden you get to the very last person and then that and as all of the income so that person has all of the income well in that case the Gini coefficient would be the percentage of this area which would be 100% which we could view as a one or a hundred and so an interesting thing to do is is look at Gini coefficients for various countries and compare them and that's exactly what we have here on this map and you can see that the the countries that are shaded red these are countries that have high Gini coefficients so this is where you have more income inequality and the ones that are shaded green are the ones where you have relatively low Gini indices or Gini coefficients and so that would be indicative of reasonably low income inequality now it's important to point out you might think that red is always bad and green is always good but this just tells you inequality it does not tell you on average how prosperous folks are what average income is in that country and so this is an indication that in places like Latin America and sub-saharan Africa you definitely have very high inequality and places like Canada and Europe you seem to have a very low inequality but it doesn't tell you that people for sure are better off in Canada than say the United States for example you could have a higher average income in the United States than you have in Canada and one can have a very spirited debate which one you would rather be would you rather be in a country that has higher inequality and higher average income or one that has lower income and lower inequality
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