Measuring Income Inequality

Read this article about the Lorenz Curve, which seeks to measure income inequality. Make sure to answer the "Try It" quiz questions, and check your answers.

4. Try It

4.1. Answer to Try It

    • Income inequality can change without affecting the poverty rate.
      Incorrect. If the upper income groups increase their incomes, then income inequality would rise but the poverty rate would remain the same.
    • A method used to look at distribution of income involves ranking households by quads.
      Incorrect. One common way of measuring income inequality is to rank all households by income, from lowest to highest, and then to divide all households into five groups with equal numbers of people, known as quintiles.
    • Poverty rates cannot change if inequality does not change.
      Correct. Poverty can change even when inequality does not move at all. Imagine a situation in which income for everyone in the population declines by 10%. Poverty would rise, since a greater share of the population would now fall below the poverty line. However, inequality would be the same, because everyone suffered the same proportional loss. Conversely, a general rise in income levels over time would keep inequality the same, but reduce poverty.