Question

Suppose that a society contains only two members, a lawyer named Monique and a handyman named James. Five years ago, Monique made \(\$ 100,000\) while James made \$50,000. This year, Monique will make \(\$ 300,000\) while James will make \(\$ 100,000\). Which of the following statements about this society's income distribution are true? Select one or more answers from the choices shown. a. In absolute dollar amounts, the entire distribution of income has been moving upward. b. In absolute dollar amounts, the entire distribution of income has been stagnant. c. The relative distribution of income has become more equal. d. The relative distribution of income has become less equal. e. The relative distribution of income has remained constant. T. The rich are getting richer while the poor are getting poorer. g. The rich are getting richer faster than the poor are getting richer.

Short answer

Statements (a), (d), and (g) are true.

Step-by-step solution

Calculate Income Change for Monique

Initially, Monique earned \( \\(100,000 \). Now, she earns \( \\)300,000 \). The change in her income is \( \\(300,000 - \\)100,000 = \$200,000 \).

Calculate Income Change for James

Initially, James earned \( \\(50,000 \). Now, he earns \( \\)100,000 \). The change in his income is \( \\(100,000 - \\)50,000 = \$50,000 \).

Analyze Absolute Distribution Movement

Both individuals have experienced an increase in income, thus, in absolute dollar amounts, the income distribution has moved upward, not stagnant. This supports statement (a) and rules out (b).

Analyze Relative Income Changes

Initially, Monique's income was 2 times James' income (\( \frac{100,000}{50,000} = 2 \)). Now, Monique's income is 3 times James' income (\( \frac{300,000}{100,000} = 3 \)). This increase in ratio indicates that the relative distribution has become less equal, supporting statement (d) and ruling out (c) and (e).

Assess Wealth Dynamics Descriptions

Both Monique and James have experienced an increase in income, so the statement (f) about the poor getting poorer is false. However, Monique's increase (\( \\(200,000 \)) is faster than James' increase (\( \\)50,000 \)), supporting (g) that the rich are getting richer faster than the poor.

Key concepts

Absolute Income Change

Absolute income change refers to the actual increase or decrease in money that individuals earn over a period.
It's straightforward as it looks at the exact change in income without considering the relative position of individuals in the income distribution.
For Monique and James, this means looking at how their income has grown in terms of dollars:

• Monique's income increased from $100,000 to $300,000, which is an absolute increase of $200,000.
• James's income increased from $50,000 to $100,000, marking an absolute increase of $50,000.

The focus here is solely on the actual difference in monetary terms between the two periods.
Understanding absolute income change is essential as it provides a clear picture of how individual or household earnings grow over time, regardless of their initial income level or the income of others in the distribution.

Relative Income Distribution

Relative income distribution concerns the proportionate levels of income that distinct groups within a society earn, and how this changes over time.
It's about ratios and percentages rather than absolute figures, and it significantly contributes to understanding income equality or inequality.

• Initially, Monique's income was twice James's income, represented as a ratio of 2:1.
• Over time, this changed to 3:1, indicating that Monique's proportion of total income in the society increased relative to James's.

The change in these ratios indicates how equally or unequally incomes are distributed among the population.
In our example, the increase in the ratio reflects a shift towards greater inequality since Monique's income grew more significantly in relation to James's income. Calculating these ratios helps us understand shifts in economic balance and power dynamics within a society.

Wealth Inequality

Wealth inequality addresses the uneven distribution of assets across a population.
While income inequality refers to the disparity in earned wages, wealth inequality is broader, concerning total assets including property, stocks, and inherited wealth.
In the scenario with Monique and James, while we see a clear income inequality increasing (as Monique's income ratio rose), the analysis doesn't include additional assets.

• Over time, even though both individuals earn more, Monique's increased capacity to save or invest potentially widens wealth inequality further.
• This wealth, over time, can lead to a compounding effect, increasing the disparity between those with more and those with less.

Evaluating wealth inequality requires considering not just income changes but how these changes affect individuals' overall economic power and capital accumulation.
Addressing wealth inequality is more complex because it involves various long-term elements that income snapshots might not immediately reveal.

Income Dynamics

Income dynamics explore how individuals' incomes change over time and their movement across income brackets.
Studying these changes involves understanding not only the current income but the potential trajectory and factors influencing changes.

• Monique and James have both experienced upward income movement, reflecting positive income dynamics.
• Their income trajectory shows how external factors like education, job market changes, or economic conditions can influence earnings.

However, Monique's larger increase suggests different influencing factors at play, which could be linked with her profession's trajectory or other external advantages.
Understanding income dynamics helps in crafting policies for economic growth and addressing income mobility, ensuring opportunities for favorable income changes are available to all societal groups.
Policymakers can devise strategies that enhance upward mobility and mitigate static or downward income movements, fostering a more balanced economic environment.