How to measure the income inequalities in economies?
The economies around the world neither show complete inequality nor complete equality in terms of income of the people.
Lorenz curve, which was developed by Max O. Lorenz represents graphically the inequality in the income.
From the Lorenz Curve, we can measure the income inequality by calculating the Gini Coefficient.
How to calculate Gini Coefficient?
Gini Coefficient allows us to numerically measure the income inequalities.
Gini Coefficient = a/b
Calculation of a: area between the line of complete equality & the Lorenz curve
Calculation of b: area between the line of complete equality & complete inequality.
Or simply put,
“Calculate the area between the 45° line & the Lorenz Curve. Then divide the area by 1/2 “(*as the area covered by complete equality line will always be half of the entire area of the graph which is equal to the area between the complete equality line & the complete inequality line).
Note: for a perfectly equal economy, the Lorenz Curve will overlap with the complete equality line (45° line). Wouldn’t it?
Range of Gini Coefficient: zero to one.
Zero represents perfectly equal economy while one represents perfectly unequal economy.
Gini Coefficients of some economies around the world :
With Great Love,
Er. Amit Yadav