Module XIV·Article I·~1 min read
Measuring Inequality: Lorenz and Gini
Income Distribution and Inequality
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Measuring Inequality: Lorenz and Gini
Inequality is an important economic and social topic. How can it be measured? The Lorenz curve and the Gini coefficient are standard tools.
Lorenz Curve
Lorenz Curve: a graphical representation of the distribution of income or wealth.
Construction:
- On the horizontal axis: cumulative % of the population (from the poorest to the richest)
- On the vertical axis: cumulative % of income
Line of absolute equality: 45° — each % of the population receives the same % of income.
The real curve: lies below the 45° line — shows that the bottom X% receives less than X% of income.
Gini Coefficient
Gini coefficient: the ratio of the area between the line of equality and the Lorenz curve to the total area under the line of equality.
Range: from 0 (absolute equality) to 1 (absolute inequality).
Examples:
- Scandinavia: 0.25–0.30
- USA: ~0.40
- South Africa: ~0.63
- Russia: ~0.37
Other Measures
- Decile/Quintile ratios: the ratio of incomes in the top groups to those in the bottom groups.
- Palma ratio: income of the top 10% / income of the bottom 40%.
- Top income shares: the share of the top 1%, 0.1% — especially useful for analyzing extreme inequality.
For the Investor
- Consumer markets: inequality affects the structure of consumption — luxury vs mass market.
- Political risk: high inequality is a potential source of instability.
- Policy implications: inequality may lead to redistributive policy.
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