How do economists measure income inequality, and how do tax and transfer policies change the distribution?
Topic 6.5 Income and Wealth Inequality: distinguish income from wealth, measure inequality with the Lorenz curve and Gini coefficient, identify the sources of inequality, and explain how progressive taxes and transfers redistribute income.
A focused answer to AP Microeconomics Topic 6.5, covering the difference between income and wealth, the Lorenz curve and Gini coefficient, the main sources of inequality, and how progressive, proportional, and regressive taxes and transfer programs redistribute income, with worked exam-style questions.
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What this topic is asking
Topic 6.5 closes the course with the distribution of income and wealth. The College Board wants you to distinguish income from wealth, measure inequality with the Lorenz curve and Gini coefficient, identify the sources of inequality, and explain how progressive taxes and transfer programs redistribute income. Where the rest of Unit 6 was about efficiency, this topic is about equity, a separate goal.
Income versus wealth
The flow-versus-stock distinction matters because policies and statistics can target either. A person can have high income but little wealth (a young high earner with debts) or high wealth but low income (a retiree living off savings). Most AP inequality measures focus on income, but the same Lorenz-curve and Gini tools can describe wealth.
Measuring inequality: the Lorenz curve and Gini coefficient
So a policy that moves the Lorenz curve closer to the 45-degree line lowers the Gini coefficient and reduces measured inequality; a policy that bows it further out raises the Gini.
Sources of inequality and redistribution
A progressive income tax is the main redistribution lever the exam tests: by taking a larger share from higher earners, it narrows the after-tax income gap, pulling the Lorenz curve toward the line of equality and lowering the Gini. Transfers do the same from the bottom up. The trade-off, hinted at but not heavily tested, is that very high redistribution can blunt the incentives to work and invest, so policy balances equity against efficiency.
Try this
Q1. Distinguish income from wealth. [2 points]
- Cue. Income is a flow earned over a period (wages, interest, profit); wealth is a stock of accumulated assets at a point in time (savings, property, shares).
Q2. State what a Gini coefficient of 0 represents and what a higher Gini implies. [2 points]
- Cue. A Gini of 0 is perfect equality; a higher Gini (toward 1) implies greater inequality.
Exam-style practice questions
Practice questions written in the style of College Board exam questions on this dot point, with worked answer explainers. The year tag is the paper they imitate, not the source.
AP 2019 (style)1 marksMultiple choice. The Lorenz curve for a country bows further away from the line of perfect equality after a change in policy. This indicates (A) less income inequality. (B) more income inequality. (C) a lower Gini coefficient. (D) perfect equality. (E) no change in distribution.Show worked answer →
The answer is (B). The further the Lorenz curve bows away from the 45-degree line of perfect equality, the more unequal the income distribution, and the higher the Gini coefficient.
(A) and (C) would mean the curve moves closer to the line. (D) is the line itself. (E) contradicts the described movement.
AP 2021 (style)3 marksFree response (short). (a) Distinguish income from wealth. (b) Explain what a Gini coefficient of 0 and of 1 each represent. (c) Explain how a progressive income tax reduces measured income inequality.Show worked answer →
A three-point short FRQ.
(a) (1 point): income is a flow earned over a period (wages, interest, profit); wealth is a stock of accumulated assets at a point in time (savings, property, shares).
(b) (1 point): a Gini coefficient of 0 represents perfect equality (everyone has the same income); a Gini of 1 represents perfect inequality (one person has all the income).
(c) (1 point): a progressive tax takes a higher percentage of income from higher earners, narrowing the after-tax gap between rich and poor and so lowering the Gini coefficient.
Related dot points
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Sources & how we know this
- AP Microeconomics Course and Exam Description — College Board (2023)