Economics/Calculating top salary earners?
QUESTION: Dear Michael,
If 100% perfectly equitable wealth distribution (no one richer or poorer) in a world population of 6 billion people means everyone would earn the same salary of, say, $1,000, does this mean if John Smith earns a salary of $10,000 (which is $9,000 more than everyone else) his earnings belongs to the top 10% category (1,000/10,000 = 10%)?
ANSWER: Thank you for your question.
Your approach to income distribution is not exactly correct. You have calculated that the majority of people earn 10% of the income that John Smith does.
When we're talking about income distribution, we want to know the total number of people and the amount of money they make. Let's say we want to know the top 10% of earners in the world; we would find out how many total people there are in the world, and then choose 10% based on income. For example, if there are 1 billion people in the world, the top 10% would include 100 million people who earn more than the others.
Something that could help you understand income distribution is the use of the Gini Coefficient and Lorenz Curve. The Lorenz Curve, in particular, gives you a visual representation of the socioeconomic disparity and the distribution of wealth within a nation. Here is a link that should help you somewhat: http://www.tutor2u.net/economics/revision-notes/a2-micro-distribution-of-income-
Also, be careful about your use of the words "wealth" and "income". These words don't mean the same thing. Income is the amount of money that a person makes in a year, while wealth is the total value of a person's assets.
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QUESTION: Dear Michael,
What if it is about ownership? Say there are 1,000 people in the whole world and there are just 1,000 of cars in the world. If 100% perfectly equitable car ownership is achieved if each person owns 1 car, but here comes John Smith who owns 10 times more cars than the average (10 vs 1) in an inequitable and unfair world. Of course there are many others owning more cars than John and also many others owning less car than John or even less than the average of 1 car (assuming a car can be divided up). But doesn't that mean John is part of the top 10% in terms of car ownership? Or am I still wrong?
If so, then how exactly do we calculate those numbers when we talk about someone belonging to the top 10% or the top 1% of something, not necessarily of income but ownership too?
In the car example, it would be impossible for me to tell whether John Smith is in the top 10%, but only because I don't have all the data for the example. He could have 10x more cars than average, but still be in the 11th percentile just because the top 10% have lots and lots of cars while everyone else has none.
When we're talking about the top 10% or 1% or 0.01%, we are typically referring to income, not wealth. So, it's based on the amount of money they make in a single year, including capital gains. The reason for this is that income and wealth, generally speaking, are closely linked. If you make more income, then you can generate more wealth by putting all that extra money into investments or hard assets of value such as homes, cars, etc. At the same time, if you have a lot of wealth in the form of investments, then those investments can generate more income (e.g.: capital gains on the value of stocks, dividend payments, bond interest income, etc.).
Sometimes these studies do refer to wealth, such as articles in Forbes like "The Richest People in America", and "The World's Billionaires List". These studies specify wealth rather than income, however, and often list both.