Ss rd-cote socialists, Appendix 2 {out of the union Measuring Inequality: The Gini Coefficient hi, the “acciden- tic, as we not xe reforms began j | ‘The Gini coefficient is the most common measure of the distribution of expenditure, income, wealth or another attribute within a given popu- ° lation. Since it is common to speak in terms of income distribution. ‘ouscholds within a population, we explain the measure in terms equality of income across households. The value of Gini varies be- ‘ween O and 1, with 0 representing a situation of perfect equality, such that income is identical across all households, and 1 representing a situ- ation of extreme inequality whereby all income is concentrated in a sin gle houschold. Between 0 and 1, higher values of the Gini are associated with higher levels of inequaliry. ‘The logic behind the Gini and its limitations can be explained with the help of the Lorenz curve (explained below), shown in Figure A2.1. ‘ On the horizontal axis, we arrange the houscholds in the rising order of i their incomes, Therefore, the household with the lowest income is the ‘ nearest to the origin and the one with the highest income is the farthest. We “normalize” the total number of houscholds to 100. On the vertical axds, we measure the cumulative incomes of houscholds as percentof — a the toral income of the population. The curve representing the cumu- lative percentage incomes of households, depicted by OAC in Figure I 21 is called the Lorenz curve. A point on the Lorenz curve represents f the percentage of the toral income by houscholds up to that point, The ‘| Lorenz curve originates at the origin since 0 percent of the households account for 0 percent of the population income. Likewise, the curve ter- { minates at 2 point showing the valucs of 100 on both horizontal and216 | Appendix 2 “Percent of Pe Figure A2.1. The Lorenz curve Yertical axes since 100 percent of the households must account for 100 percent of the population income, ‘The Gini coefficient equals the area between the diagonal OO" and the Lorenz curve divided by the triangle OBO. It is immediately obvi ous thar if che Lorenz. curve coincides with the diagonal OO', coefficient becomes 0 since the area between the diagonal and the Lorem. Gurve is zero in this case. Alternatively, if the Lorenz curve coincides with triangle OBO’, the Gini coefficient becomes 1. In this case, the area be- ween the Lorenz curve and the diagonal is triangle OBO’ and its ratio to triangle OBO' is 1. In all other cases, the valuc of the Gini coefficient is strictly beeween 0 and 1. the Gini In the first of the above extreme cases in which the Lorenz curve coincidgs With the diagonal, the income is identical across all house. holds. Identical distribution implies tha the bottom 10 percent of the households account for 10 percent of the total income, the bottom 20 Percent for 20 percent of the income, and so on. These points ae o course on the diagonal. In the second extreme case in which the Lorenz curve coincides with triangle OBO’, the distribution is the most un equal it can be. The most unequal distribution implies that all income is concentrated in one household. This means that all houschold.oO 100 must account for L00 she diagonal OO" and ‘tis immediately obvi- iagonal OO’, the Gini jagonal and the Lorene az curve coincides with ni this case, the area be- gle OBO" and its ratio of the Gini coefficient thich the Lorenz. curve sntical across all house- atom 10 percent of the income, the bottom 20 on. These points are of case in which the Lorenz jbution is the most un- 1 implies that all income s that all households ex- Appendix | 217 — Figure A2.2. Two Lorenz curves with the same value of the Gini coefficient cept one have zero income so that the Lorenz curve coincides with the hhorizontal axis except when we get to the last household, at which point che curve coincides with the vertical axis. The Lorenz curve is thus represented by triangle OBO’. The lower the shate of the house- holds at the bottom, the closer is the Lorenz curve to the horizontal axis at the bottom. Likewise, the larger the share of the houscholds at the top, the closer is the Lorenz curve to the vertical axis at the top. Both these factors pull the Lorenz. curve away from the diagonal. “Therefore, the more unequal the distribution, the farther the Lorenz. curve is from the diagonal and therefore the closer is the value of the Gini coefficient to 1. Finally, observe that any given value of the Gini coeflicient i consis- ene with infinitely many shapes of the Lorenz curve, so that the frequent references to Gini coefficients actoss time or regions as measures of in- equality must be handled with care. Figure A2.2 illustrates this point, Here we draw two Lorenz curves, OBA’O' as a solid line and OABO" as a dotted line, Because the area between the Lorenz curve and the di- agonal isthe same in the two cases, the value of the Gini coefficient as- sociated with them is the same. Yet the two Lorenz curves represent very vsow @public_affairs on Two i218 | Appendix2 different distributions of income. The dotted curve shows a large pro Portion of the bottom houscholds as having no income and hence is a sociated with a significance volume of abject poverty. The solid line exhibits less poverty at the bottom but is characterized with a high de gree of concentration at the wp, Most obse bution represented by the solid line far more acceptable than. tha represented by the dotted line, though both are associated with the same value of the Gini coefficient,