Income is most often earned through wages and is what an individual receives for their hours of labour or investments. The government usually taxes an employee’s income and the government, allocated by the federal budget, uses the revenue of income taxes. If a family’s level of income is less than the average income level, necessary goods and services can become too expensive and this creates the possibility for the family to fall into poverty.
Income can be thought of as GDP per capita and is often an indicator of economic growth and development. Typically as the GDP per capita a economy is likely developing. But, just looking at GDP per capita ignores the effect of income distribution. The GDP per capita, for example, can grow from only an increase in incomes of the wealthiest 0.5% of the population and the poorest can even be getting poorer. This is not a situation of good economic development even though GDP per capita is rising.
Income distribution measures the amount of income earned by different divisions within the population. The Lorenz curve models how income is distributed throughout a community and measures income inequality. The Gini coefficient measures inequality as a statistical measure among frequency distributions. These two measures provide both a graphic and a quantitative representation of income distribution respectively.
Income inequality is a prevalent issue in the United States and many other countries, which is why income distribution an important topic in macroeconomics.