Gini Index

The Gini index is a measure of inequality in the distribution of income or wealth, expressed as a number between 0 and 1, where 0 represents perfect equality and 1 represents perfect inequality. The index is one of the most widely used measures of inequality.

Definition and Calculation

The Gini index is derived from the Lorenz curve, which plots the cumulative share of income received by the cumulative share of the population, when the population is ordered from poorest to richest. Perfect equality corresponds to a straight line, and perfect inequality to a right angle.

The Gini index is the ratio of the area between the Lorenz curve and the line of equality to the total area below the line of equality. It therefore ranges from 0, when the Lorenz curve coincides with the line of equality, to 1, when it lies along the axes.

Interpretation

The Gini index is a summary measure of the entire distribution. A higher value indicates greater inequality. The index is scale-independent, since it is unaffected by a proportional change in all incomes, and it is population-independent, since it is unaffected by the size of the population.

The index is a single number, and it does not convey all the information about a distribution. Two distributions with the same Gini index may differ in other respects, including the position of the poor and the concentration of wealth at the top. The index is therefore best used alongside other measures.

Variants

Variants of the index are used to address its limitations. The Gini coefficient for disposable income measures inequality after taxes and transfers, while the coefficient for market income measures inequality before them. The comparison of the two provides information about the redistributive effect of policy.

The concentration index, applied to wealth, measures the inequality of wealth, which is typically higher than the inequality of income. Wealth is more concentrated because it accumulates over time and can be inherited.

Uses

The Gini index is used to compare inequality across countries and over time. It is used in the analysis of the effects of policy on distribution, and in the assessment of progress towards development goals.

The index is also used in the analysis of the relationship between inequality and growth. The evidence is mixed, with some studies finding that high inequality reduces growth and others finding that the relationship is weak or depends on the stage of development.

Limitations

The Gini index has limitations. It does not distinguish between different types of inequality, and it may not capture the position of the poorest, since it is insensitive to transfers among the rich.

The measurement of the index is also subject to issues of data quality. Income data may be understated, particularly at the top of the distribution, and wealth data are often incomplete. The choice between income and consumption as the basis for measurement affects the results, and comparisons across countries require consistent definitions.

The Lorenz Curve

The Lorenz curve is the graphical representation of the distribution of income. It plots the cumulative share of income against the cumulative share of the population, with the population ordered from poorest to richest.

The curve starts at the origin and ends at the point representing the whole population and the whole income. For a perfectly equal distribution, the curve is a straight line from the origin to that point. For any other distribution, the curve lies below the line, since the poorest receive a smaller share of income than their share of the population.

The Lorenz curve is a useful device for comparing distributions. If one Lorenz curve lies entirely above another, the corresponding distribution is more equal. If the curves cross, the comparison is ambiguous, and a single summary measure may not capture the difference.

Global Inequality

The Gini index is used to measure inequality across countries and globally. Global inequality, which measures the distribution of income among all individuals in the world, is higher than the inequality within most countries.

The measurement of global inequality requires data on the distribution of income within each country and on the differences in average income across countries. The data are incomplete, particularly for the poorest countries, and the estimates are subject to uncertainty.

The trend of global inequality has been debated. Some studies find that global inequality has declined, as the incomes of large developing countries have grown, while others find that it has remained stable or increased. The difference depends on the treatment of China and India and on the choice of data.

The Gini Index and Policy

The Gini index is used to assess the redistributive effect of policy. The difference between the coefficient for market income and the coefficient for disposable income measures the effect of taxes and transfers on inequality.

The index is also used in the analysis of the relationship between inequality and various outcomes, including economic growth, health, and social mobility. The evidence on these relationships is mixed, and the interpretation is contested.

The use of the index in policy analysis requires attention to its limitations. The index is a summary measure, and it may mask important features of the distribution. It is best used alongside other measures, including the shares of income received by different parts of the distribution, and with attention to the quality of the underlying data.

Summary

The Gini index is a widely used measure of inequality, derived from the Lorenz curve. Its interpretation and its use require attention to its limitations, to the choice of data, and to the broader context of the distribution.

See also

• Income Inequality
• Relative Poverty
• Statistics