Updated: Nov 24, 2021
When researching the topic of inequality, I noticed that one term was frequently mentioned to compare income inequality across countries—the Gini Coefficient. What is it? Why is it used to measure inequality?
Gini Coefficient, or Gini index, is developed by Italian statistician Corrado Gini in 1912, based on the Lorenz curve which was proposed by American economist Max Lorenz in 1905. The Lorenz curve is a plot showing the cumulative share of income (Y-axis) earned by the bottom percentage of the population (X-axis). For example, the bottom 20% of the population accounts for 5% of the total income, or the bottom 90% owns 55% of the total income. Perfect equality would be represented by a straight diagonal line (45 degrees) on the graph, meaning, for example, the bottom 20% of the population has 20% of the total income, the bottom 90% has 90% of the income, and so on and so forth. The Gini Coefficient is the ratio of the area between the perfect equality line and the Lorenz curve (A) over the area below the perfect equality line (A+B).
Source: Economics Help (https://www.economicshelp.org/blog/glossary/lorenz-curve/)
The Gini index is a well-recognized tool to measure economic inequality in a country. The ratio ranges between 0 and 1, with the former indicating perfect equality and the latter complete inequality, as depicted by the aforementioned graph. In reality, the Gini index for covered countries generally ranges between 0.2 and 0.6.