And it's not surprising that the distribution of income
is not uniform, right, it's Various people get various income.
And we can see, looking at this graph, that the distribution in
the United States, for example, it's not really a normal distribution.
It's not a bell curve, for the simple reason that it's truncated at zero, right?
There are some people who spend more money than they get in a given year,
but Is mostly truncated at zero here.
So we have an income distribution
that looks like a bell curve that's been cut off.
And I just want to point out that the reason you get this little stack here on
the right is because we really try to spread out this tail as far as it goes.
I actually wouldn't have room to draw it out, right?
So this will go on for a long long time,
probably to the other side of your room, wherever you are sitting right now, so
we've sort of lumped this here on the right tail.
Okay, so these are the incomes for the United States, and
we could probably do the same for almost any country where you are,
we would need to know a lot of information.
We would need to know the income of every household in your country that we can do
this and once we have this distribution we can talk about the mode income,
the income that's most prevalent.
We can talk about the median income.
So in the United States 50% of households have an income of less than 51,000 and
50% have incomes that are greater than 51,000.
And we can also go ahead, and we can calculate the average income, and
the average income of a household in the United States is about $67,000.
Lately, in the United States, there's been a lot of interest on this
right tail of the distribution, this high end tail, so
just to give you a little indication of sort of what the right tier looks like.
The top 20% of the income distribution
have a household income greater than 100,000.
The top 5% have an income that's greater than 180,000.
I like to mention this because I think most of us would think of 180,000 a year
as being a really enormous amount of money.
And yet, 5% of American households have an income that's greater than this.
To be in the top 1% you would actually have to have
an income greater than $386,000 a year.
So it's really quite a hard club to join and
I'm sure in the country where you're sitting right now.
You could do the same type of analysis and again,
you'll probably find that the right tail of distribution is very, very long.
So It's pretty hard to join that club of the top 1% okay,
so this is the graph of the distribution and looking at the graph is informative.
It gives us a sense of what the distribution looks like and
we can talk about these various cutoffs.
For the sake of econometric analysis or
statistics analysis of economic data It would be useful
to somehow translate this whole distribution into one number.
And that's what we will do in the next few steps, so
we're going to do it step by step.
The first step is to look at the whole pie that's generated in this economy, see
you can think of all the money, all the income that's generated in the economy.
And think about what section of this pi is received
by which quartile of which 20% of the distribution.
So again, what we're doing here is we're looking at the whole distribution from
the person who gets the least to the person who gets the most.
We divide this whole distribution into five segments, or five of 20% and
we asked what section of the pie goes to each one of these twenty percents.
So, the metaphor that I find useful here is to think maybe of a family with five
brothers.
And supposed you had this nice, big chocolate cake that you were thinking of
dividing between your five brothers, or your five children.
How would you choose to divide it?
