The Lorenz Curve & Gini Coefficient
- The two main measures of income inequality are the Lorenz Curve and the Gini coefficient
The Lorenz Curve
- The Lorenz Curve is a visual representation of the income inequality that exists between households in an economy
- Data is commonly presented in quintiles (population divided into five groups, i.e 20%) or deciles (population divided into ten groups i.e 10%)
- E.g. In 2020, 49% of the income flow in Bolivia went to the top 20% of households, while only 4% went to the bottom 20%
- E.g. In 2020, 49% of the income flow in Bolivia went to the top 20% of households, while only 4% went to the bottom 20%
- Perfect income distribution is not the goal (20 % of the population gets 20% of the income; 40% gets 40% of the income etc.)
- That would equate to socialism and completely remove incentives for work, as everyone would be paid equally
- That would equate to socialism and completely remove incentives for work, as everyone would be paid equally
- More equal income distribution is desired as it reduces poverty and social unrest
- What constitutes acceptable income equality is a normative economic issue
Diagram: Lorenz Curves for Sweden, the UK and Bolivia
An illustration of income inequality for Bolivia (blue line), Sweden (red line), and the UK (yellow line) using a Lorenz Curve Model. The income distribution in Bolivia is more unequal than that of Sweden
Diagram analysis
- The line of equality represents perfect income distribution (not desirable)
- In Bolivia the bottom 20% of households receive 4% of the income flow, while in Sweden they receive 9% of the income flow
- In the UK, the top 10% of households receive 45% of the income flow, while in Sweden they receive 25%
- Sweden has a more equal distribution of income than the UK
The Gini Coefficient
- The Lorenz curve can be used to calculate the Gini Coefficient
Diagram: How the Gini Coefficient is Determined
The Gini Coefficient is calculated using the area beneath the line of equality
Diagram analysis
- A represents the area between the line of equality and Bolivia's Lorenz curve
- B represents the area under the Lorenz curve
- A value of 0 represents absolute equality (socialism) and 1 represents perfect inequality
- In 2017, Estonia's coefficient was 0.3, compared with a value of 0.62 in South Africa
- The distribution of income in Estonia was more equitable than in South Africa
- Governments use progressive taxation and transfer payments to shift the Gini coefficient closer to zero
Worked example
Using a Lorenz curve diagram, explain what happened to income inequality in Bolivia between 2008 and 2016
Income Gini Coefficient Data for Bolivia
Income Gini Coefficient 2008 | 0.51 |
Income Gini Coefficient 2016 | 0.43 |
Step 1: Determine if inequality has improved or worsened
The closer to zero, the closer the country is to perfect equality
The situation in Bolivia has improved so the Lorenz curve is moving closer to the line of perfect equality
Step 2: Draw and label the Lorenz Curve for each year
Step 3: With reference to your diagram, explain what has happened to the income inequality between the two time periods
The closer the Gini coefficient is to zero, the more equal the distribution of income in a country. Bolivia's Gini coefficient has moved closer to zero, indicating that there is less income inequality in 2016 than there was in 2008. This is illustrated by an inward shift of the Lorenz curve towards the line of perfect equality