The rich tend to earn more income than the poor, and so more wealth seems to fall majorly in the hands of a few rich people while the majority earn very little. One’s earnings depend on several factors such as the demand and supply for the person’s skills. As the factors influence wages, they end up affecting the distribution of a country’s income. With income inequality, the rich tend to earn higher income while the poor earn low incomes. That differentiates the poor from the rich. Such inequality has several impacts on the economy and the population.
To measure inequality, economists use some measures. Through one such measure, they compare household incomes through surveys. The process involves a comparison of the sources of income and the consumption patterns of the households that participate in the survey. To rank individuals in accordance to per capita income for each household, economists subtract direct taxes from the total income for the household. They then divide the amount by the number of individuals in the household. The calculation and the ranking give the Gini coefficient. The Gini coefficient is a method applicable to the measurement of inequality. The Gini coefficient has a range of 0 to 100 whereby 0 represents a period when everyone has the same income (Milanovic, 2011 p.7). The income inequality in a country would generally range between 25 and 60 in the Gini range. In the assessment of income inequality, household surveys come out as the best instruments. However, they have some drawbacks. At times, the rich may refuse to participate in interviews or at times they may understate their incomes.
Another useful measure of income inequality is the Lorenz curve. With this measure, economists seek to determine how cumulative percentage of households links to cumulative percentage of income (Mankiw and Taylor, 2014 p.386).