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Inequalities of Development Lorenz Curve and Gini Coefficient

Inequalities of Development Lorenz Curve and Gini Coefficient. Measurements. Measurements of Income Distribution. Lorenz Curve: A curve showing the proportion of national income earned by a given percentage of the population.

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Inequalities of Development Lorenz Curve and Gini Coefficient

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  1. Inequalities of DevelopmentLorenz Curve and Gini Coefficient

  2. Measurements

  3. Measurements of Income Distribution • Lorenz Curve: • A curve showing the proportion of national income earned by a given percentage of the population. • e.g what proportion of national income is earned by the top 10% of the population?

  4. Lorenz Curve % of National Income This line represents the situation if income was distributed equally. The poorest 10% would earn 10% of national income, the poorest 30% would earn 30% of national income. 30% 10% 10% 30% Percentage of Population

  5. Lorenz Curve % of National Income In this second example, the Lorenz curve lies further below the line of equality. Now, the poorest 30% only earn 7% of the national income. The Lorenz Curve will show the extent to which equality exists. The greater the gap between the line of equality and the curve the greater the degree of inequality. In this example, the poorest 30% of the population earn 20% of the national income. 20% 7% Percentage of Population 30%

  6. Gini Coefficient • Enables more precise comparison of Lorenz Curves • The proportion of the area taken up by the Lorenz Curve in relation to the overall area under the line of equality

  7. The total area under the line of equality Gini Coefficient % of National Income The area bounded by the Lorenz Curve Percentage of Population

  8. Pros Generally regarded as gold standard in economic work Incorporates all data Allows direct comparison between units with different size populations Attractive intuitive interpretation Cons Requires comprehensive individual level data Requires more sophisticated computations The Gini Coefficient Twice the area between the Lorenz curve and the equality diagonal.

  9. The Lorenz Curve The Lorenz curve represents the distribution of income; it expresses the relationship between cumulative percentage of households and cumulative percentage of income.

  10. A Hypothetical Lorenz Curve The data in (a) were used to derive the Lorenz curve in (b). The Lorenz curve shows the cumulative percentage of income earned by the cumulative percentage of households. If all households received the same percentage of total income, the Lorenz curve would be the line of perfect income equality. The bowed Lorenz curve shows an unequal distribution of income. The more bowed the Lorenz curve is, the more unequal the distribution of income.

  11. Lorenz Curve for the United States, 1998

  12. The Gini Coefficient The Gini Coefficient is a measurement of the degree of inequality in the income distribution. The Gini Coefficient is equal to the Area between line of perfect income equality and the actual Lorenz Curve, divided by the Entire Triangular are under the line of perfect income equality. A Gini Coefficient of 0 is complete income equality while a Gini Coefficient of 1 means complete income inequality.

  13. A Limitation of the Gini Coefficient • The Gini Coefficient cannot tell us what is happening in different quintiles. • We should not jump to the conclusion that because the Gini coefficient is lower in country 2 than in country 21, the lowest fifth of households have a greater percentage of total income, in country 2, than in country 1.

  14. A Limitation of the Gini Coefficient By itself the Gini coefficient cannot tell us anything about the income share of a particular quintile. Although there is a tendency to believe that the larger percentage of total income the lower the Gini coefficient, this need not be the case. In the diagram, the Gini coefficient for Lorenz curve 2 is lower than the Gini coefficient for Lorenz curve 1. But the bottom 20 % of households obtains a smaller percentage of total income in the lower Gini Coefficient case.

  15. How evenly spread is the world’s wealth?

  16. World distribution of wealth (PPP) Lorenz Curve Line of total integration Cumulative Wealth (PPP) Cumulative Global Population

  17. World distribution of wealth Lorenz Curve The richest 10% possessed 46.9% of the world wealth in 1988. Line of total integration Cumulative Wealth (PPP) Cumulative Global Population

  18. World distribution of wealth Lorenz Curve The richest 10% possessed 50.8% of the world wealth in 1993. Line of total integration Cumulative Wealth (PPP) Cumulative Global Population

  19. World distribution of wealth (PPP) Lorenz Curve Line of total integration Cumulative Wealth (PPP) The greater this area the more unequal the distribution Cumulative Global Population

  20. What is a Gini Coefficient? • The Gini coefficient, invented by the Italian statistitian Corado Gini, is a number between zero and one that measures the degree of inequality in the distribution of something. • The coefficient would register zero (0.0 = minimum inequality) for a society in which each member received exactly the same amount. • A coefficient of one (1.0 = maximum inequality) would mean one member got everything and the rest got nothing.

  21. Calculating the Gini Coefficient Although the Lorenz Curve is good visual indicator of distribution equality, the Gini Coefficient provides a clearer quantatitive value. A / B = Gini Values should lie between 0 (total integration) to 1 (total segregation). B Line of total integration Cumulative Wealth (PPP) A Cumulative Global Population

  22. Tasks • Plot Lorenz Curves for 1988 and 1993 data on graph paper. Answer • Calculate the Gini Coefficient for both. What do these tell you about trends in world distribution of wealth between 1988 and 1993? Answer • Economist’s estimate that the world's Gini coefficient fell to 0.63 in 1998 from 0.66 in 1970. Plot a graph to show fluctuations over time. Answer

  23. What are typical Gini Coefficients for countries around the world? In practice, coefficient values range from around 0.2 for historically equalitarian countries like Bulgaria, Hungary, the Slovak and Czech republics and Poland to over 0.6 for Central and South American countries (such as Brazil) where powerful elites dominate the economy. The evolution of the Gini coefficient is particularly useful as it reveals trends. It shows the evolution towards greater equality in Cuba from 1953 to 1986 (0.55 to 0.22) and the growth of inequality in the USA in the last three decades during which the Gini went from 0.35 in the '70's to 0.40 now (and it is still rising!). Most European countries and Canada rate around 0.30, Japan and some Asian countries get around 0.35, some reach 0.40 while most African countries exceed 0.45. Source:http://berclo.net/inden.html

  24. A Fairer Future for the World? • Global trends for the Gini coefficient of wealth can be rather confusing and distorted by the rapid growth of large Tiger Economies like China. • “The gap between the worlds’s rich and poor has never been wider. Malnutrition, AIDS, conflict and illiteracy are a daily reality for millions.” MakePovertyHistory.ORG

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