A key economic question for anygovernment regardless of their market organisation is “for whom toproduce?”. This question deals with howto distribute income or output and how much of a good or service differentindividuals in a population should receive. My interest in income inequality first started when I was studyingmacroeconomics in my IB economics class.
I was intrigued in how market systemsoperated in allocating recourses in an economy and the effect of this on itspopulation. After looking further intothis I was astonished at the extent of its affect, it not only was a decisivefactor in how a person´s life played out, but also is a key input in governmentpolicy considerations. This piqued my interest in the topic, and made me wonderhow exactly it was measured.
Ultimatelyleading to me investigating Modelling and calculating degrees of incomeinequality, with the aim being to accurately model and represent incomeinequality of nations using mathematics from the IB standard level syllabus,and establish what the best measure is. All markets in the world operateunder a form of free market economics in which demand and supply functionsdetermine the price and how much of a good is produced. Thus, in this situation, how manygoods and services an individual receives is based on their, or theirhouseholds´ income. Income is simply a payment for selling any of the 4 factorsof production: land, labour, capital or entrepreneurship Thus, the amount ofgoods or services one receives is based off of the amount or the price of thefactors they are able to sell. This isproblematic however as “Ownership offactors of production is highly unequal, and because the prices of factors ofproduction determined in the market vary enormously.”Thus, while most people can provide recourses, some people cannot,and may struggle to, if even, meet basis needs to survive: food, shelter, waterand clothing.
Most societies believe that this is unjust, this idea has beensolidified in the universal declaration of Human rights that “Everyone has the right to a standard of living adequate for thehealth and well-being of himself and of his family, including food, clothing,housing and medical care and necessary social services.” It is because of this that all governments around the worldstrive to achieve a more equitable level of income distribution throughouttheir populations. However, in order tocorrect this they must first calculate the level of income in theireconomies. “An inequality measure is often a functionthat ascribes a value to a specific distribution of income in a way that allowsdirect and objective comparisons across different distributions.”Oneway in which to represent income inequality graphically is by constructing Lorenzcurves, a diagram which shows the degree of income inequality in a nation.