Gini՚s Coefficient Measure of Inequality YouTube Lecture Handouts

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Gini՚s Coefficient: Measure of Inequality - Basis, Calculation, Advantages, Disadvantages

Title: Gini՚s Coefficient Measure of Inequality

What is Gini՚s Coefficient?

By

1912: Paper “Variability & Mutability”

  • Measurement of Inequality
  • 0 (perfect equality) and 1 (perfect inequality) .
  • Values over 1 are theoretically possible due to negative income or wealth.
  • A higher Gini index indicates greater inequality, with high income individuals receiving much larger percentages of the total income of the population.
  • A country in which every resident has the same income would have an income Gini coefficient of 0. A country in which one resident earned all the income, while everyone else earned nothing, would have an income Gini coefficient of 1.

Wealth Distribution

OR

Absolute Wealth

  • The Gini coefficient is an important tool for analyzing income or wealth distribution within a country or region, but it should not be mistaken for an absolute measurement of income or wealth.
  • A high-income country and a low-income one can have the same Gini coefficient, as long as incomes are distributed similarly within each: Turkey and the U. S. both had income Gini coefficients around 0.39 - 0.40 in 2016, though Turkey՚s GDP per person was less than half the U. S.
  • The Gini index is often represented graphically through the Lorenz curve, which shows income (or wealth) distribution by plotting the population percentile by income on the horizontal axis and cumulative income on the vertical axis.
Measurement of Inequality
(%) (%)
163186318--
217228040
3588548
412369784
5316100100
Total
  • % of population has % of income. That is poorest 63 % percent of people have 18 % of income. Next 17 % contribute towards next 22 % of income.
  • and are the cumulative percentages and income. That is for second row 63 and 17 are added to get 80. Similarly, 22 and 18 are added to get 40. This means that poorest 80 % of the population has 40 % of the income. Note that are the values plotted on Lorenz curve.
  • The value of for the first case is and value of for the first case is .
  • Based on data, GC is 0.52, i.e.. , marginally towards concentration. Value of 0.8 would have been more towards concentration and value of 0.3 would mean a more equitable distribution.

Calculating Gini՚s Coefficient

Advantages of Gini՚s Coefficient

  • Compare across population sectors & nations
  • Based on ratio analysis
  • Simple and easy to interpret
  • Explains inequality over time
  • It satisfies four important principles:
  • Independent of the high and low earners in society.
  • Independent of the size of the economy, way of measurement, or economic status of any nation.
  • Independent of the population size.
  • Transfer Principle: It satisfies transfer principle, i.e.. , if income (less than half of the difference) , is transferred from rich to poor, then income distribution is equal.
  • It provides a simple measure towards egalitarian society for several parameters like education, income, wage etc.

Disadvantages of Gini՚s Coefficient

  • Reason for inequality is not explained
  • Ignores life cycle incomes
  • Does not measure inequality of opportunity (poor nation can be poor due to oligarchy)
  • If rich and poor nation have same Gini coefficient then it measures two different things. In poor nation, inequality in material life quality is measured while in rich nations it measures distribution of luxuries.
  • Person՚s income changes throughout life and this is not considered under Lorenz curve. That is, it ignores life cycle effects.

Manishika