Macroeconomic Goal of an Equitable Distribution of Income

"from a social and moral point of view, an increase in a nation's prosperity is not much use unless all of its citizens, rather than just a select few, get to enjoy and share in it" (John Sayre and Alan Morris, Principles for Microeconomics, McGraw-Hill Ryerson, 2009, p28).

As a nation, we try to find a balance between perfect inequality and perfect equality of wealth. If there is large disparity, the lower class might not be able to afford the cost of living. On the other extreme, if everyone is earning the same annual salary there is no incentive to work harder or compete and therefore no economic growth. This balance is shown graphically on the Lorenz curve and measured by the Gini Coefficient. There are many factors that affect the distribution of wealth in an economy, but the government achieves a reasonable distribution through social welfare programs and taxing methods such as progressive taxation. Progressive taxation is the act of taxing an individual based on their level of income, the higher the income the higher the tax rate. These taxes pay for transfer payments such as welfare programs that essentially help to achieve an equitable distribution of income. (http://www.credit-terms.com/tax/progressive-taxation.html)

Gini Coefficient = A/(A+B)
Perfect Equality = 0
Perfect Inequality = 1

Lorenz Curve
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