Income inequality describes how unevenly income is distributed across people or households in a society. It matters because income affects access to housing, education, health care, transportation, and financial security. Measuring the gap helps economists, governments, and citizens understand whether economic growth is being shared broadly or concentrated among a smaller group.
For personal finance, inequality also shows why two families with the same work effort may face very different opportunities and risks.
Key Facts
- Income inequality measures differences in income across individuals, households, or groups.
- Mean income = total income divided by number of people or households.
- Median income is the income in the exact middle of a ranked list, so half earn more and half earn less.
- Income share = group income divided by total income, often written as Income share = group income / total income.
- The Gini coefficient ranges from 0 to 1, where 0 means perfect equality and 1 means one person receives all income.
- Percentiles divide a population into ranked groups, such as the bottom 20 percent, middle 20 percent, and top 20 percent.
Vocabulary
- Income inequality
- The unequal distribution of income among people or households in an economy.
- Median income
- The income level at the middle of a ranked list, with half of earners above it and half below it.
- Mean income
- The average income found by adding all incomes and dividing by the number of earners.
- Gini coefficient
- A number from 0 to 1 that summarizes how unequal an income distribution is.
- Income percentile
- A position in the income distribution that shows what share of people earn less than a given income.
Common Mistakes to Avoid
- Confusing mean income with median income is wrong because a few very high incomes can pull the mean upward while the median stays closer to a typical household.
- Assuming inequality and poverty are the same is wrong because inequality measures gaps between incomes, while poverty measures whether people fall below a minimum standard of living.
- Comparing incomes without adjusting for household size is wrong because a household income must support different numbers of people depending on the family.
- Using one statistic alone to judge inequality is wrong because measures like the Gini coefficient, percentile shares, and median income each reveal different parts of the distribution.
Practice Questions
- 1 Five households have annual incomes of 35,000, 60,000, and $200,000. Find the mean income and the median income.
- 2 In a town, the bottom 50 percent of households earn a total of 30 million. If total household income is $100 million, what income share does each group receive?
- 3 A country has a rising average income, but its median income has stayed nearly the same for ten years. Explain what this suggests about how income gains may be distributed.