Assignment: Income Inequality

Consider the following

Image two communities: Mazushi and Muyrico.

A-What is the income inequality ratio for each community?

There are different mathematical and statistical formulas and models, which are employed to measure income inequality in a particular community or country. Some of these statistical models are complex and sophisticated, whereas some are simple to apply to obtain desired information (information about income inequality). For this question, we will use Kuznets Ratio to learn that in which of these two communities, Mazushi and Muyrico, there is greater income inequality.

To estimate income inequality, through Kuznets Ratio, for a particular community, we must first estimate (in percentage) size of a particular class/group of a community. After finding that percentage, we should estimate (in percentage) the income which that class/group earns. We will minus the percentage size of the percentage income, and we will divide the remaining value into two (2). (Note: The range of Kuznets Coefficient is between 0 and 1 it means higher the value, the higher the income inequality in that community).

Mazushi Community

Residents Earning high income = 5
Residents Earning low income = 5
High income = $90,000 (earned by 5 residents)
Low income = $30,000 (earned by 5 residents)
Percentage of residents earning high income = 5/10 *100 = 50%
Percentage of Income earned by high earning residents = $90,000/$120,000 *100 =75%
Now subtracting Percentage of residents (high income) from the percentage of income = 25%
Dividing it by two = 0.125

Muyrico Community

Residents Earning high income = 5
Residents Earning low income = 5
High income = $250,000 (earned by 5 residents)
Low income = $50,000 (earned by 5 residents)
Percentage of residents earning high income = 5/10 *100 = 50%
Percentage of Income earned by high earning residents = $250,000/$300,000 *100 =83%
Now subtracting Percentage of residents (high income) from the percentage of income = 33%
Dividing it by 2 = 0.166

From the estimation, it is apparent that income inequality is greater in Muyrico in comparison to Mazushi. However, the inequality, difference, between the two communities is around 4% (in percentage).

B-Which Community has the more unequal distribution of income, and why?

We can claim, based on our estimation (Kuznets Ratio/Coefficient) that Muyrico has an unequal distribution of income. There could be several reasons for this income inequality. For instance, this income inequality could be a result of socioeconomic, socio-political and political-economic factors and policies. As per studies, population distribution and political-economic policies are the major cause of income inequality. When governments devise policies to benefit (economically) a particular segment of society, the income equality in that society increases. However, the increase in inequality is usually more gradual rather than rapid. If the increase in income inequality were rapid, it would adversely and strongly affect the political-economic system.

C-Why wmight someone prefer to live in Muyrico, instead of living in Mazushi?

An ambitious individual would prefer to live in Muyrico; this is because economic opportunities in Muyrico are more lucrative than the opportunities offered or produced by Mazushi. It is a known fact that large cities, where income inequality is greater than the other cities, tend to produce lucrative economic/financial opportunities at great frequency. Therefore, an ambitious individual would prefer to live in Muyrico. Also, the lifestyle of Muyrico would also be more attractive, as there is more income inequality; therefore, lifestyle could be another reason for preferring Muyrico. It is imperative to acknowledge that preference is associated with a number of economic factors, such as taste and income. Furthermore, a number of economic factors constitute the preference of an individual for particular goods, service, etc.