Inequality can be difficult to measure as there are many variables to take into account. How do economists do it and how reliable are their methods? This explanation will show you how to estimate inequality through the Gini coefficient, or the Gini index.
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Jetzt kostenlos anmeldenInequality can be difficult to measure as there are many variables to take into account. How do economists do it and how reliable are their methods? This explanation will show you how to estimate inequality through the Gini coefficient, or the Gini index.
The Gini coefficient is a measure of income or wealth inequality within a population. It ranges from 0 to 1, where 0 means perfect equality (everyone has the same income or wealth) and 1 means perfect inequality (one person has all the income or wealth).
The Gini coefficient is a statistical measure of income inequality in which 0 represents perfect equality and 1 represents perfect inequality. It is commonly used to measure income distribution within a population.
Statistician Corrado Gini developed the Gini coefficient in 1912.
The Lorenz curve and the Gini coefficient are closely related. The Lorenz curve is a graphical representation of income or wealth distribution within a population. It visualises the degree of income or wealth inequality within a population. A perfectly equal distribution of income or wealth would result in a straight diagonal line, while a perfectly unequal distribution would result in a curve that hugs the horizontal axis before sharply rising to the top right corner of the graph.
The Gini coefficient is calculated by dividing the area between the Lorenz curve and the line of perfect equality by the total area under the line of perfect equality. The Lorenz curve and the line of perfect equality are plotted on the same graph, with the cumulative share of income or wealth on the y-axis and the cumulative share of the population on the x-axis. The Lorenz curve represents the actual income or wealth distribution, while the line of perfect equality represents the hypothetical distribution if everyone had an equal share of income or wealth.
To calculate the Gini coefficient, we need to calculate the area between the Lorenz curve and the line of perfect equality. We can do this by dividing the area between the Lorenz curve and the line of perfect equality by the total area under the line of perfect equality.
The Gini coefficient formula is:
\(\hbox{Gini coefficient}=\frac{\hbox{Area A}}{\hbox{Area A + Area B}}\)
where:
Fig. 1 - Gini coefficient
In the diagram above, Area A is 7, and Area B is 13. Using the formula:
\(\hbox{Gini coefficient}=\frac{\hbox{Area A}}{\hbox{Area A + Area B}}\)
\(\hbox{Gini coefficient}=\frac{7}{(7+13)}=\frac{7}{20}=0.35\)
In this example, income is distributed quite equally, but there is still room for improvement.
You're probably wondering if a higher Gini coefficient is better. In general, no, the higher the Gini coefficient, the higher inequality in population. Take a look at the Gini coefficient range below (Figure 2), it will help you interpret the Gini coefficients in different countries.
The value of the Gini coefficient ranges from 0 to 1. A coefficient of 0 indicates perfect equality. It means that every 1% of the population has access to 1% of national income, which is unrealistic. A coefficient of 1 indicates perfect inequality. It means that 1 individual has access to 100% of the country’s national income.
As the figure above shows, a coefficient between 0–0.3 indicates relative equality. Relative to a Gini coefficient of 0, income or wealth is distributed quite equally. A coefficient between 0.3–0.4 indicates that there is adequate equality. This means that income or wealth is distributed in a suitable way, but can be distributed more equally. A coefficient greater than 0.4 is an important point and indicates that there is a big income gap. Inequality above this level often means that there is social and political instability or tension. A coefficient between 0.5–1 means that there is severe inequality within an economy.
The Gini coefficient is important because it helps economists measure income or wealth inequality. Economists are interested in how income and wealth inequality change over time in an economy as well as the difference in economic inequality between different countries.
Whilst the Gini coefficient has proved to be beneficial to help measure income and wealth inequality, it does have some limitations.
One significant limitation is that a lot of information can be lost. For example, in 2016, Turkey and the US had the same Gini coefficient. While both countries may experience similar levels of inequality, the Gini coefficient fails to account for the differences in population size, and how large each economy is.
Like many other measures of inequality, the Gini coefficient shouldn’t be used as the sole measure of income inequality. It could be used alongside other measures, such as the decile ratio or the Palma ratio, to look at the broader scope of inequality within an economy.
The list of countries and their corresponding Gini coefficient values reveals that some of the countries commonly thought of as being "developed" have relatively high levels of income inequality compared to other countries that are less developed. For instance, the United States, which is often seen as an economic powerhouse, has a Gini index of 41.5, which indicates higher income inequality than that of Mexico (45.4), Brazil (48.9), and Hong Kong (53.9). Meanwhile, some countries with lower levels of income inequality include Slovakia (23.2), Slovenia (24.4), and Denmark (27.7).
Table 1. Gini index by country2 | |||
---|---|---|---|
Country | Gini Coefficient | Country | Gini Coefficient |
Slovakia | 0.232 | Switzerland | 0.331 |
Slovenia | 0.244 | Canada | 0.333 |
Belgium | 0.272 | Spain | 0.343 |
Algeria | 0.276 | United Kingdom | 0.351 |
Denmark | 0.277 | Vietnam | 0.357 |
Finland | 0.277 | New Zealand | 0.362 |
Norway | 0.277 | Yemen | 0.367 |
Sweden | 0.293 | Haiti | 0.411 |
Austria | 0.302 | United States of America | 0.415 |
Poland | 0.302 | Mexico | 0.454 |
Nepal | 0.328 | Singapore | 0.459 |
Portugal | 0.328 | Brazil | 0.489 |
Tunisia | 0.328 | Hong Kong | 0.539 |
Japan | 0.329 | Colombia | 0.542 |
Greece | 0.331 | South Africa | 0.63 |
The Gini coefficient in the UK has changed significantly over the past few decades (figure 3). In the most reWe will try to examine some of the factors that have contributed to these changes.
The UK experienced a sharp increase in inequality from 1978 until the 1980s. Some of the reasons that explain that rise in inequality are:
From the mid-1970s to the 1990s, the top 1% saw increased access to the UK’s national income. This was largely due to:
The Gini coefficient is the measure of the distribution of income which quantifies the level of economic inequality in an economy.
You can calculate it using this formula: Area A / (Area A + Area B), where area A is the area between the line of equality and the Lorenz curve. Area B is the remaining area between the Lorenz curve and the 𝑥 axis.
The Gini coefficient is the mathematical calculation of income or wealth inequality. The Lorenz curve is a visual representation of income or wealth inequality in a country.
The Gini coefficient measures income or wealth inequality within a population. It ranges from 0 to 1, where 0 means perfect equality (everyone has the same income or wealth) and 1 means perfect inequality (one person has all the income or wealth).
The Gini coefficient of 1 1 means perfect inequality (one person has all the income or wealth).
What is the Gini coefficient?
The measure of the distribution income.
What does a coefficient of 0 mean?
It indicates perfect equality. This means that every 1% of a population has access to 1% of national income.
What does a coefficient of 1 mean?
It indicates perfect inequality. This means that one individual has access to 100% of the country’s national income.
What is the difference between the Gini coefficient and the Lorenz curve?
The Gini coefficient is a mathematical measure of the distribution of income, while the Lorenz curve is a visual representation of income or wealth inequality.
What does a coefficient > 0.4 mean?
It indicates that there is a big income gap and there must be some level of social and political instability.
What is the range of the Gini coefficient?
It ranges from 0 to 1.
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