of the population. The vertical axis measures real GDP in cumulative percentages. As you move up the vertical axis, the
percentage of real GDP becomes larger and larger, capping at 100 percent. Each point on the 45-degree line represents
an equality between real GDP and population.
Points that are off the line are indicators that there is an inequality of income. Sometimes points are to the left of the
line, which indicate that total income is greater than population. On the other hand, if the points are to the right of the
line, this indicates that total population is greater than total income. Whenever total population is greater than income,
you have a declining total income; whenever total income is greater than total population, you have an increasing total
income. The farther any point strays from the line of equality, the more of an inequality in the distribution of income
we have. Figure 11-6 is an illustration of the Lorenz curve.
Figure 11-6In Figure 11-6 we can see that the distribution of income is not equal until the last point on the curve. We know that
there is an inequality because the plot points are straying from the line of equality. The farther they stray, the farther we
are from an equal income distribution. Our graph shows that the income distribution seems to be declining as a result of
less GDP and more population.
The government has a responsibility to limit the number of inequalities through some specific areas:
■ Cyclical changes in the economy:The government can limit unemployment through government spending and
taxation.
■ Job skills:The government can reinforce the structure of education, thereby increasing the knowledge and skills
of the current and future workforce.
■ Social shortcomings:The government can offer transfer payments to those who are experiencing unemployment
or disabilities. Social security payments, food stamps, and unemployment compensation are all types of transfer
payments that can redistribute income in the United States.It is important to remember that the Lorenz curve does not indicate who the poor are or what their quality of life is. The
Lorenz curve is a relative measure of income distribution. The saying “one man’s shack can be another man’s castle” is
true when describing the relative measure of income distribution. What is considered poverty here could be considered
middle or even upper class in another country.
Economists can measure income before any government intervention affects the distribution of income, although the
process is extremely difficult. This measurement gives us a more accurate figure of the distribution of income.
10 080604020(^020406080) 10 0
Line of income
equality
Total Population
Total Income
The Government’s Role, Externalities, and Efficiency