0:48

And it's not surprising that the distribution of income

Â is not uniform, right, it's Various people get various income.

Â And we can see, looking at this graph, that the distribution in

Â the United States, for example, it's not really a normal distribution.

Â It's not a bell curve, for the simple reason that it's truncated at zero, right?

Â There are some people who spend more money than they get in a given year,

Â but Is mostly truncated at zero here.

Â So we have an income distribution

Â that looks like a bell curve that's been cut off.

Â And I just want to point out that the reason you get this little stack here on

Â the right is because we really try to spread out this tail as far as it goes.

Â I actually wouldn't have room to draw it out, right?

Â So this will go on for a long long time,

Â probably to the other side of your room, wherever you are sitting right now, so

Â we've sort of lumped this here on the right tail.

Â Okay, so these are the incomes for the United States, and

Â we could probably do the same for almost any country where you are,

Â we would need to know a lot of information.

Â We would need to know the income of every household in your country that we can do

Â this and once we have this distribution we can talk about the mode income,

Â the income that's most prevalent.

Â We can talk about the median income.

Â So in the United States 50% of households have an income of less than 51,000 and

Â 50% have incomes that are greater than 51,000.

Â And we can also go ahead, and we can calculate the average income, and

Â the average income of a household in the United States is about $67,000.

Â Lately, in the United States, there's been a lot of interest on this

Â right tail of the distribution, this high end tail, so

Â just to give you a little indication of sort of what the right tier looks like.

Â The top 20% of the income distribution

Â have a household income greater than 100,000.

Â The top 5% have an income that's greater than 180,000.

Â I like to mention this because I think most of us would think of 180,000 a year

Â as being a really enormous amount of money.

Â And yet, 5% of American households have an income that's greater than this.

Â To be in the top 1% you would actually have to have

Â an income greater than $386,000 a year.

Â So it's really quite a hard club to join and

Â I'm sure in the country where you're sitting right now.

Â You could do the same type of analysis and again,

Â you'll probably find that the right tail of distribution is very, very long.

Â So It's pretty hard to join that club of the top 1% okay,

Â so this is the graph of the distribution and looking at the graph is informative.

Â It gives us a sense of what the distribution looks like and

Â we can talk about these various cutoffs.

Â For the sake of econometric analysis or

Â statistics analysis of economic data It would be useful

Â to somehow translate this whole distribution into one number.

Â And that's what we will do in the next few steps, so

Â we're going to do it step by step.

Â The first step is to look at the whole pie that's generated in this economy, see

Â you can think of all the money, all the income that's generated in the economy.

Â And think about what section of this pi is received

Â by which quartile of which 20% of the distribution.

Â So again, what we're doing here is we're looking at the whole distribution from

Â the person who gets the least to the person who gets the most.

Â We divide this whole distribution into five segments, or five of 20% and

Â we asked what section of the pie goes to each one of these twenty percents.

Â So, the metaphor that I find useful here is to think maybe of a family with five

Â brothers.

Â And supposed you had this nice, big chocolate cake that you were thinking of

Â dividing between your five brothers, or your five children.

Â How would you choose to divide it?

Â 5:19

Most of us have the inclination of thinking of dividing the pie equally but

Â of course that income distribution is not divided equally.

Â We have one brother, here, eating half of the pie.

Â We have another brother eating about a quarter of the pie, so

Â that leaves three brothers eating only one quarter of the pie.

Â Three brothers together are sharing one-fourth of the pie.

Â And I just want to point out that one of the brothers is really getting

Â a tiny little sliver of the pie here, just 3% of the distribution.

Â So this is one way of thinking about how this pie is shared across

Â the population of the economy, but remember my goal is to take this pie,

Â and to take this idea of inequality and translate it into one number.

Â So let's do that.

Â 6:56

pull out what happened to the cumulative percentage of that income, right.

Â So, we'll have a dot somewhere here 20% and

Â 3% and we'll add these dots together, okay.

Â So now I have a question for you, what would this Lorenz Curve look like?

Â Or where would this dots be if the income in our society was

Â distributed exactly equal?

Â Suppose this for a moment, think about this and turn it back on the game, okay.

Â If we had complete inequality,

Â our Lorenz Curve would be along this black line, right?

Â This is the of perfect equality, 20% of the distribution, 20% of the pie.

Â If we add another 20%, we have 40% of the distribution eating 40% of the pie.

Â We add another 20%,

Â 60% of the distribution eats 60% of the pie and so on and so forth.

Â 8:44

The real distribution in the United States is somewhere in between, right?

Â We have 20% of the distribution eating 3% of the pie,

Â the next 20% we add those, the next 20%.

Â Now we have three brothers together, we know that they eat about 25%

Â of the pie we add another one and we get close to 50% of the pie and

Â of course we have to add the richest 20% to get all the way up here to 100.

Â So you can see this green line it's not quite at the line of equality and

Â it's not my Bill Gates society which would be along here.

Â I did somewhere in between.

Â They're not equal as the income distribution,

Â the closer we are going to be to the line of equality.

Â And the less equal as our distribution,

Â the further away we will be from the line of equality.

Â 10:34

If we plot the income distribution and the wealth distribution,

Â we will see that the income distribution is closer to the 45 degree line.

Â In other words, inequality in wealth is greater than inequality in income.

Â And a lot of this change comes from this left part of the distribution,

Â the people who really don't have a lot.

Â To start acquiring wealth you have to be able to eat less than you get,

Â in other words you have to be able to save.

Â In any given year, you have to have some savings at the end of the year and

Â we can see that for the left end of the distribution, this is very hard to do and

Â you can see that the wealth for this bond in 20% is almost zero.

Â Okay, and that's one reason that the wealth distribution

Â is further away from the line of equality.

Â 13:48

So you can choose the country of your choice.

Â I want to note there's a lot of countries here that are white, and

Â their white because we don't have full data.

Â To do all this, it's not enough just to know what the average income is,

Â what the median income is.

Â You need to know the whole distribution of income and you don't have the data for

Â all the countries.

Â But these are a lot of countries that we do have data for, and

Â we can plot the Gini ratio.

Â And I always like to point out to my students that when we look at this graph,

Â we can see that the United States is actually more like what?

Â It's more like the Soviet Union than it is like Europe.

Â We here in America always like to compare ourselves to Europeans.

Â We think they're our closest allies, they have a democracy like we have in America.

Â But we can see that in terms of the gini ratio,

Â we're really not very much like them.

Â And you can find the country where you live you can see if you live

Â in South America, you're likely to have quite a lot of inequality.

Â If you look here in Scandinavian countries,

Â you are probably not surprised to learn that you have very little inequality.

Â Their Gini ratio is very small.

Â 15:00

We can look at the data in another way.

Â We can look at what happens to the Gini ratio over time and

Â here's some data on a few countries around the world.

Â And if your country isn't here, maybe you can do some research and try and

Â graph the data for your country.

Â And share it with us on the forum this week but

Â here are some countries that I would like to highlight.

Â First of all, because I'm teaching in the United States, I do like to point out that

Â here in the United States we had a period during 70s when GINI ratio dropped,

Â where inequality fell or equality rose.

Â This was during the Johnson administration,

Â where we had the war on poverty and I'll come back to this in the second segment.

Â 15:47

Since then, the GINI ratio has been more or less increasing steadily.

Â Okay, and we have a Gini ratio that is much higher than it was in the mid 60s.

Â We have countries where the Gini ratio has been falling, Brazil.

Â Here we have a Gini ratio that is extremely high and

Â in the latest expansion of the Brazilian economy, not only is the pie as

Â a whole growing, but we also see that the equality is increasing.

Â So the Gini ratio in Brazil is falling.

Â Sometimes, we have economic growth and

Â it's coupled with a decrease in the Gini ratio.

Â On the other hand sometimes we have economic growth that's coupled with

Â an increase in the Gini ratio.

Â So here we have China and China had a relatively low Gini ratio.

Â Notice please that we don't have data from before the 1990's.

Â But here we have a very low GINI ratio, and look what has happened.

Â The GINI ratio has really sky rocketed.

Â