Question

A figure that measures the relationship between the cumulative percentage of money income on the vertical axis and the cumulative percentage of families on the horizontal axis is called the a. family-income curve. b. Washington curve. c. Lorenz curve. d. Gini curve.

Short answer

The correct answer is c. Lorenz curve, as it represents the relationship between cumulative percentages of income and families in the context of income distribution.

Step-by-step solution

Identifying the related concept

In economics, the concept of measuring income inequality involves a curve that shows the cumulative percentage of total income received by the cumulative percentage of recipients, typically households or families.

Comparing the options

We will go through each option to identify the appropriate choice. a. Family-income curve: This option is not widely recognized as a concept used for measuring income distribution. b. Washington curve: The Washington curve is not a recognized concept in economics for measuring income distribution. c. Lorenz curve: The Lorenz curve represents the income distribution of a population and is a graphical representation of the relationship between the cumulative percentage of income received against the cumulative percentage of recipients (households or families in this case). This option fits the description given in the question. d. Gini curve: The Gini curve is not a recognized term in economics. However, it's essential to mention "Gini coefficient" which is a measurement of inequality, typically calculated from the Lorenz curve's data.

Answer

Since the Lorenz curve fulfills the criteria mentioned in the question and is a well-recognized concept regarding measuring income distribution, the correct answer is: c. Lorenz curve

Key concepts

Income Inequality

Income inequality is a term used to describe the uneven distribution of income within a population. It's a measure that highlights the gap between the rich and the poor. In economics, this disparity is not merely a statistic but is increasingly seen as a signifier of the health of an economy and the wellbeing of a society.

A society with high income inequality might have a substantial portion of its wealth concentrated in the hands of a small percentage of its population, while the majority earn significantly less. This can lead to a variety of social, economic, and political issues, such as increased poverty rates, social unrest, and reduced economic growth. Analyzing income inequality helps economists and policy-makers understand the effects of fiscal and monetary policies and aids in the design of interventions intended to create a more balanced and fair economy.

Gini Coefficient

The Gini coefficient is a single number aimed at measuring the degree of inequality in a distribution, such as income or wealth. Represented by a value between 0 and 1, where 0 signifies perfect equality (everyone has the same income) and 1 denotes perfect inequality (one person has all the income), the Gini coefficient provides a succinct measure of income dispersion.

It is typically derived from the Lorenz curve, which is a graphical representation that plots the cumulative percentage of total income against the cumulative percentage of recipients, usually individuals or households. The Gini coefficient quantifies the area between the Lorenz curve and the line of perfect equality (also known as the line of equity or the 45-degree line). The larger the space between the curve and the line of equity, the higher the Gini coefficient, signifying a greater degree of income inequality.

Cumulative Distribution

Cumulative distribution, in the context of income inequality, refers to the way in which income is accumulated across different segments of the population. It is a statistical technique that shows the percentage of individuals or households that fall below certain income levels.

The Lorenz curve, as discussed in the previous sections, is one way to visualize a cumulative distribution of income. By graphically representing the cumulative percentage of the population against the cumulative percentage of income earned, the shape of the Lorenz curve can provide insights into the level of income inequality within the society being studied. For example, a Lorenz curve that lies close to the 45-degree line of equity suggests low income inequality, while a curve that bows further away indicates higher inequality.