Gini Coefficient & The Lorenz curve

The Lorenz Curve

A graphical device for illustrating the extent of inequality in a society.

The curve plots the percentage of a nation’s income which is enjoyed by the poorest ‘x’ per cent of the nation’s population.

Values of ‘x’ are between 0 and 100.

For example the poorest 10% of the nation’s population enjoyed only 1% of its income. To show this we would plot 10 on the horizontal axis and 1 on the vertical axis.

If the poorest 15% of the nation’s population enjoyed 1.7% of its income, we would plot a point showing this. The poorest 15% of the population include the poorest 10%, the further we go to the right on the horizontal axis, the more of the population is included.

The horizontal axis is labelled as cumulative percentage of the population.

The vertical axis is labelled as cumulative percentage of income.

The closer the Lorenz curve is to the diagonal line of equity, the more evenly distributed the nation’s income is. If the Lorenz curve is further away from the line of equity the nation’s income is more unevenly distributed.

The UK’s progressive tax system acts to redistribute income to reduce the level of inequality.

More info:

Distribution of Income & Wealth - Tutor2u

Gini Coefficient

A numerical measure of inequality.

From the Lorenz curve the gini coefficient can be defined as the area between the diagonal and the Lorenz curve divided by the total area under the diagonal.

Gini coefficient =Section A

Section A + Section B

Explaining the change in equality

Changing labour market participation

Decrease in male participation mainly in households where there are no other workers.

Increased female participation among those with working partner lead to increased polarisation between two-earner and zero-earner households.

Increasing skills premium

Skill-biased technical change

International trade and the Stolper-Samuelson theorem

Institutional factors

Decline in role of trade unions

Wages policies and Wages Councils abolished

Equal pay act

National Minimum Wage

Exam Questions

Evaluate the view that the most effective way to reduce poverty is to redistribute both income and wealth from the rich to the poor.

Using economic theory, explain the causes of the unequal distribution of income in UK.