Inequality

Lorenz Curve

• Purpose: Graphically represents income or wealth distribution within a population

• Axes:

  • X-axis: Cumulative percentage of the population (from poorest to richest)

  • Y-axis: Cumulative percentage of total income or wealth

• Interpretation:

  • A 45° line (Line of Equality) indicates perfect equality—each percentage of the population earns the same percentage of total income

  • The Lorenz curve plots actual distribution; the more it bows below the line, the greater the inequality

Gini Coefficient

• Definition: A numerical measure of income or wealth inequality derived from the Lorenz curve

• Calculation:

  • Formula: Gini = A / (A + B)

    • A: Area between the Lorenz curve and the Line of Equality

    • B: Area under the Lorenz curve

• Range:

  • 0: Perfect equality (everyone has the same income).

  • 1: Perfect inequality (one person has all the income)

• Interpretation:

  • A higher Gini coefficient indicates greater inequality

Key Takeaways

• Purpose: Both tools measure and visualize economic inequality

• Complementary: The Lorenz curve provides a visual representation; the Gini coefficient quantifies it

• Policy Implications: Understanding these measures helps in assessing the effectiveness of policies aimed at reducing inequality