Unit 7

Question 1

How do you label and draw a Lorenz curve?

Answer 1

. Triangle with straight vertical line to right.
. X-axis: Cumulative share of people from lowest to highest incomes.
. Y-axis: Cumulative share of income earned.
. Put ‘100%’ at top of y-axis and to right of x-axis.
. Label hypotenuse ‘Line of equality (45 degree)’.
. Draw a curve, starting from bottom left corner to top right corner and label it ‘Lorenz curve’ (looks like half width of oval).
. Label bit that’s top-left of line ‘A’ and other side ‘B’

Question 2

Formula for Gini Coefficient:

Answer 2

Gini coefficient = A ➗ (A + B)

Question 3

Give formula for disposable income:

Answer 3

Disposable income = Gross income – direct tax + state benefits

Question 4

Define Gini coefficient:

Answer 4

The ratio of the area between the 45 degree line and the Lorenz curve. The higher the Gini coefficient the more unequal income (or wealth) distribution is.

Question 5

Replacement ratio (%) formula:

Answer 5

(Disposable income out of work ➗ disposable income in work) x 100