6 Income Inequality in America Defining and Measuring Income Inequality While most of us have a basic idea of what is meant by “income inequality,” precision is required in order to fully understand the political controversies and factual debates that surround it. Given the complexity of measuring inequality, the statistics can be manipulated to serve the argument at hand. Any claim about inequality requires careful examination. Inequality of What? First, we must clearly answer the question: Inequality of what? At the root of concern about inequality is concern about ­ fairness—how much “better off” is one person than another and is that difference fair? The question of economic inequal- ity limits itself to differences in material well-being, not differ- ences in, for example, happiness, intelligence, or soccer ability. Comparing material well-being also requires drawing a clear distinction between income and wealth. In everyday language, we might use the terms “rich,” “high-income,” and “wealthy,” as if they mean the same thing, but in economics, “income” and “wealth” are conceptually distinct. Both income and wealth are significant determinants of material well-being: either can provide a household the means to purchase food, housing, health care, and other goods. “Income” refers to resources, usually monetary, received by a household or an individual over a fixed time period, such as a month or a year. For most people today, income consists mainly of a wage or salary but could also include savings interest, rent, profits, government payments, royalties, alimony, gifts, and so on. “Wealth” refers to the stock of resources that a house- hold or individual has accumulated, minus the value of any debt. In dollar terms, wealth is the total value of material and financial assets owned (home, automobiles, savings accounts, retirement accounts, etc.) minus the value of any debt (mort- gage, credit card balances, student loans, etc.). A household’s wealth is sometimes referred to as its “net worth.” Economists
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