Lorenz Curve + Gini Coefficient

• Income inequality is one of the biggest criticisms of free labor markets
• Economists use two different measures of income inequality: the Lorenz curve and the Gini coefficient
• Lorenz curve


  Gives a visual interpretation of income inequality for a given country
• Gini coefficient


  Takes the visual information from the Lorenz curve and gives a mathematical number to interpret the level of income inequality
• Constructing Lorenz curves


  1. Label the y-axis as cumulative % of income and the x-axis as cumulative % of population

  2. The upward sloping linear line represents the line of perfect equality

  3. The Lorenz curve compares the actual distribution of income to the line of perfect equality

  4. The closer the Lorenz curve is to the line of perfect equality, the more equal the distribution of income
• Gini coefficient equation


  Section A / (Section A + Section B)

  Where Section A is the area between the Lorenz curve and the line of perfect equality, and Section B is the area beneath the Lorenz curve
• Gini coefficient interpretation


  0 = perfect equality, 1 = perfect inequality

  The closer to 0, the more equal the income distribution

  The closer to 1, the more unequal the income distribution
• Lorenz curves and Gini coefficients can be used to evaluate the effectiveness of government policies to redistribute income