📈 The Lorenz Curve and Gini Coefficient
Lorenz curve: The Lorenz curve plots the cumulative percentage of income (vertical axis) against the cumulative percentage of the population (horizontal axis), ranked from poorest to richest. The further the Lorenz curve is from the line of perfect equality (45° line), the greater the inequality.
The Gini coefficient
The Gini coefficient is a numerical measure of income inequality, derived from the Lorenz curve:
Formula: $$\text{Gini} = \frac{A}{A + B}$$ where A = area between the line of equality and the Lorenz curve, and B = area below the Lorenz curve.
- Gini = 0 → perfect equality (everyone earns the same).
- Gini = 1 → perfect inequality (one person earns everything).
- Most countries fall between 0.25 (very equal, e.g. Nordic countries) and 0.65 (very unequal, e.g. South Africa).
- The Gini coefficient can also be expressed as a percentage (0 to 100).
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🔍 Interpreting and Evaluating the Gini
Comparing countries
- A rise in the Gini coefficient → income distribution has become more unequal.
- A fall in the Gini coefficient → income distribution has become more equal.
- Useful for comparing inequality across countries or over time within a country.
- Policies like progressive taxation, transfer payments, and minimum wages tend to lower the Gini.
Limitations
- Does not show where the inequality occurs (middle vs extremes).
- Two countries can have the same Gini but very different Lorenz curves.
- Does not account for wealth inequality (only measures income flows).
- Does not capture non-monetary factors (public services, healthcare, education).
- May not reflect the informal economy in developing countries.
- Sensitive to the income definition used (pre-tax vs post-tax, includes vs excludes transfers).
Always specify whether you are discussing income Gini or wealth Gini. Income Gini is more commonly reported, but wealth inequality is typically much higher.