THEORY%20OF%20DISTRIBUTION%20OF%20INCOMES

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THEORY OF DISTRIBUTION OF INCOMES
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INCOME AND WEALTH

• INCOME total amount of money received by a
  person or household during a given time period
  (usually a year). Consists of
• wages or labor earnings (about two-thirds of
  personal income),
• property income such as rents, interest, and
  dividends (particularly important for high-income
  groups),
• transfer payments or receipts from the
  government, such as social security or
  unemployment insurance.

• WEALTH consists of the net euro/crown value of
  assets owned at a point in time
• In a households wealth is included
• tangible items (like houses, cars and other
  consumer durable goods, and land),
• financial assets (like cash, savings accounts,
  bonds, and stocks).

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INCOME COMPONENTS

• The total income of households can be divided
  into
• labor income (YL),
• income from ownership of land and capital (YA,
  YK),
• income in the form of transfer payment (YT).
• Y YL YA YK YT

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Sources of Inequality in Labor Income

• abilities and skills
• intensity of work
• differences among occupations
• differences in education
• other factors f. e. discrimination and
  exclusion from certain occupations, good/bad luck

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Inequalities in property income

• inheritance many wealthy people inherited a
  great deal of their property from their parents
  or grandparents,
• savings a recent study suggests that only a
  small fraction of personal wealth, perhaps 20 ,
  can be explained by life-cycle savings,
• risk taking (doing business) entrepreneurship
  seems to be the surest route to great wealth.

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MEASUREMENT OF INEQUALITY

• how substantial is the dispersion of disposable
  incomes, and how the degree of inequality of
  income distribution can be measured explain
  diagram known as the LORENZ CURVE
• Lorenz curve depicts relationship between
• complete equality,
• absolute inequality and
• actual inequality.

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Lorenz curve
100
80
Line of complete equality
60
Percentage share of national income (cumulative)
40
Lorenz curve
20
O
O
100
60
80
20
40
Percentage of population
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GINI COEFFICIENT

• further tool for measuring of inequality is so
  called Gini coefficient, which compares actual
  Lorenz curve with the ideal curve. Measures the
  difference between the area below the ideal
  Lorenz curve and the area below the actual Lorenz
  curve
• G A /AB
• Gini coefficient can vary from 0 to 1.
• G 1 corresponds to extreme case of absolute
  inequality in incomes
• G 0 case of absolute equality in income
  distribution

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Lorenz curve and Gini coefficient
100
80
Line of complete equality
60
Percentage share of national income (cumulative)
40
Lorenz curve
20
O
O
100
60
80
20
40
Percentage of population
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REDISTRIBUTION PROCESSES IN ECONOMY

• primary distribution - the income distribution
  (wages, interests, profits and rent) among the
  households that is result of market mechanism
• result of income redistribution is final
  distribution of income income was increased by
  transfer payments (social security, unemployment
  insurance, pensions for elderly ..) and decreased
  by taxes, fines and other payments to state
  budget and other funds.

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THE EFFECT OF REDISTRIBUTION ON ECONOMIC ACTIVITY

• Administrative costs there are always
  associated direct non-productive (especially
  administrative) costs with redistribution
• The impact on working effort and entrepreneurship
  redistribution processes often weaken the
  motives to work and taking risk by
  entrepreneurship
• Impact on savings and investment