AP Syllabus focus: ‘Income levels and poverty rates vary widely across groups and countries.’
Measuring inequality means describing how unevenly income and wealth are distributed and how many people fall below a poverty threshold. Clear measurement choices shape what comparisons across groups and countries actually mean.
Core concepts and what is being measured
Income vs. wealth
Income and wealth capture different aspects of economic well-being and can show different inequality patterns.
Income: A flow of earnings received over a period of time (such as wages, rent, interest, and transfers), typically measured per month or per year.
Wealth is typically more unequal than income because it accumulates over time and can generate additional income.
Wealth (net worth): A stock of assets owned at a point in time minus liabilities (debts).
Poverty as a related outcome
Poverty measures focus on the lower tail of the income distribution and help interpret statements like “income levels and poverty rates vary widely across groups and countries.”
Poverty rate (headcount ratio): The percentage of people (or households) with income below a defined poverty line.
How income inequality is commonly measured (without a single index)
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FAQ
A relative line is tied to a country’s typical income (e.g., a fraction of median income), while an absolute line is a fixed real standard.
Relative poverty can rise even if living standards improve.
Households pool resources and share fixed costs (housing, utilities).
Per-person measures can overstate inequality if larger households are concentrated at particular income levels.
It rescales household income to reflect household size and composition.
This improves comparability of living standards across singles, couples, and families with children.
Assets like privately held businesses are difficult to value.
High-wealth households are less likely to respond to surveys, and some wealth is held in hard-to-track forms.
A single national poverty line ignores regional price differences.
Real purchasing power for the same nominal income can vary substantially across cities and rural areas.
