The Lorenz Curve and Gini Coefficient

[dropcap style=”boxed”]T[/dropcap]he distribution of Income in an economy is represented by a Lorenz Curve and the degree of income inequality is measured through the Gini Coefficient. One of the five major and common macroeconomic goals of a government is the equitable (fair) distribution of income.

the lorenz curve

 

The Lorenz Curve

The Lorenz Curve (the actual distribution of income curve), a graphical distribution of wealth developed by Max Lorenz in 1906, shows the proportion of income earned by any given percentage of the population. The line at the 45º angle shows perfectly equal income distribution, while the other line shows the actual distribution of income. The further away from the diagonal, the more unequal the size of distribution of income.

In the below example, the Lorenz Curve, which represents the actual distribution of income in a country, shows how the poorest 20% of the population only earn 5% of the national income in this population. While in a case of perfect equality, the poorest 20% of the population would make 20% of the income. The more bowed out a Lorenz Curve; the higher is the inequality of income in the country.

The Lorenz Curve Diagram

 

The Gini Coefficient

The Gini Coefficient, which is derived from the Lorenz Curve, can be used as an indicator of economic development in a country. The Gini Coefficient measures the degree of income equality in a population. The Gini Coefficient can vary from 0 (perfect equality) to 1 (perfect inequality). A Gini Coefficient of zero means that everyone has the same income, while a Coefficient of 1 represent a single individual receiving all the income.

The Gini Coefficient is equal to the area between the actual income distribution curve and the line of perfect income equality, scaled to a number between 0 and 100. The Gini coefficient is the Gini index expressed as a number between 0 and 1.

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