Distribution of income and wealth: WACE Year 12 Economics Unit 4
“Distinguish income from wealth, explain how the Lorenz curve and Gini coefficient measure inequality, and evaluate the causes, effects and policy responses to income inequality in Australia”
Income is a flow earned over time; wealth is a stock of assets held at a point in time. Inequality is measured with the Lorenz curve, which plots cumulative income against cumulative population, and the Gini coefficient, a number from 0 (perfect equality) to 1 (total inequality). Australia uses progressive tax and transfer payments to redistribute, balancing equity against efficiency.
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What this dot point is asking
SCSA wants you to distinguish income from wealth, explain and interpret the Lorenz curve and Gini coefficient, and evaluate the causes, effects and policy responses to inequality. Expect a Lorenz curve interpretation and a short or extended response on the equity-efficiency trade-off.
Income versus wealth
Income is the flow of money received over a period, such as wages, profit, rent, interest and government transfers. Wealth is the stock of assets owned at a point in time (property, shares, superannuation, savings) minus liabilities. Wealth is far more unequally distributed than income in Australia.
The two are linked: wealth generates income (rent, dividends, interest), and saved income builds wealth, so initial inequality can compound over time.
Measuring inequality
The Lorenz curve plots the cumulative percentage of total income earned against the cumulative percentage of the population, ranked from poorest to richest. The Gini coefficient is the ratio of the area between the line of perfect equality and the Lorenz curve to the total area under the line of equality, giving a single number between 0 (perfect equality) and 1 (one person has everything).
The further the Lorenz curve bows away from the 45-degree line of perfect equality, the more unequal the distribution and the higher the Gini coefficient.
Suppose Australia's Gini coefficient for income is about 0.32 before tax and transfers and falls to a lower figure after them. The fall shows the redistributive effect of the tax and welfare system: progressive taxation takes proportionally more from high earners, and transfer payments lift the incomes of the lowest groups, pulling the Lorenz curve closer to the line of equality. A rising Gini over time would signal widening inequality.
Causes of inequality
- Differences in skills, education and occupation, which drive large wage gaps.
- Ownership of wealth and capital, which generates income and compounds over generations.
- Unemployment and underemployment, which cut household income.
- Technological change and globalisation, which can reward high-skill workers and capital while squeezing low-skill jobs.
- Housing and asset price growth, a major driver of wealth inequality in Australia.
Effects of inequality
Some inequality is widely seen as necessary for incentives: the prospect of higher reward encourages effort, skill acquisition, risk-taking and investment, supporting efficiency and growth. But excessive inequality can reduce social mobility, weaken aggregate demand (lower-income households spend a higher share of income), and create social and political tension.
The central tension in income distribution policy is that measures to increase equity (higher taxes on high incomes, generous transfers) can reduce efficiency by blunting incentives to work, save and invest, while measures that maximise efficiency can widen inequality. SCSA expects you to weigh both sides rather than treating either equity or efficiency as an absolute goal.
Policy responses
Australia redistributes income mainly through:
- Progressive income tax, where higher incomes are taxed at higher marginal rates.
- Transfer payments, such as the Age Pension, JobSeeker, family payments and disability support.
- Social wage spending on health, education and public services that benefit lower-income groups most.
These policies reduce measured inequality but involve the efficiency cost above, which is why the level of redistribution is a continuing political debate.
Income and wealth are different and are distributed differently. Wealth is far more concentrated than income in Australia, largely through property and superannuation. A question about the distribution of wealth is not answered by data on income, and vice versa. Be clear about which stock or flow the question asks about before quoting figures or drawing a Lorenz curve.
Exam-style questions
Questions in the style of SCSA exam questions on this dot point, each with a worked answer. They are written by ExamExplained unless tagged "Past paper"; the year shows the paper a question is modelled on.
WACE 2023-style10 marksExplain how the Lorenz curve and Gini coefficient measure income inequality, and evaluate the use of progressive taxation and transfer payments to reduce inequality in Australia.Show worked answer →
A 10 mark response needs the measurement tools explained, then an evaluation of the policy tools.
Lorenz curve. Plots the cumulative share of income against the cumulative share of population, ranked poorest to richest. The further it bows below the 45-degree line of perfect equality, the greater the inequality.
Gini coefficient. The ratio of the area between the equality line and the Lorenz curve to the whole area under the equality line, giving a number from 0 (perfect equality) to 1 (total inequality).
Policy evaluation. Progressive income tax takes a higher marginal rate from high earners; transfer payments (Age Pension, JobSeeker, family payments) lift the lowest incomes. Together they lower the Gini after tax and transfers, pulling the Lorenz curve toward equality. The cost is the equity-efficiency trade-off: high marginal rates and means-tested transfers can blunt incentives to work, save and invest.
Markers reward correct descriptions of both measures, the redistributive mechanism, and a balanced equity-versus-efficiency judgement.
WACE 2022-style6 marksDistinguish between income and wealth, and explain why wealth is more unequally distributed than income in Australia.Show worked answer →
A 6 mark response needs both definitions and the reason for greater wealth inequality.
Income is a flow received over a period (wages, profit, rent, interest, transfers). Wealth is a stock of assets owned at a point in time (property, shares, superannuation) minus liabilities.
Wealth is more concentrated because it accumulates: saved income builds assets, and assets generate further income (rent, dividends), which compounds over time and across generations. In Australia, property and superannuation are the main drivers, and rising house and asset prices have concentrated wealth in older and higher-income households.
Markers reward the flow-versus-stock distinction and the compounding and asset-price explanation for greater wealth inequality.