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The Gini coefficient is the most commonly used measure of inequality. The coefficient is named after the Italian statistician and demographer Corrado Gini (1884—1965), who invented the measure in 1912. While the Gini coefficient is often used to measure income and wealth inequality, it is also widely employed to indicate uneven distribution in other social issues, such as industrial location and development, health care, and racial segregation. The coefficient ranges from 0 to 1, with 0 representing perfect equality (i.e., everyone has the same income) and 1 perfect inequality (i.e., a single person has all the income). An extension of the Gini coefficient is the Gini index, which equals the Gini coefficient multiplied by 100.
The Gini coefficient is calculated based on the Lorenz curve (Lorenz 1905) of income distribution. The Lorenz curve is plotted showing the relationship between the cumulative percentage of population and the cumulative percentage of income. The diagonal or 45 degree line indicates a perfect distribution of population and income (e.g., 30 percent of the population earns 30 percent of the income and 80 percent of the population earns 80 percent of the income).
The Gini coefficient is the ratio of the area between the Lorenz curve of income distribution and the diagonal line of perfect equality (the shaded area or area A in Figure 1) to the total area underneath the line of perfect equality. Putting it into an equation: the Gini coefficient = area A/(area A + area B). The further the Lorenz curve is below the line of perfect equality, the greater the inequality in the distribution of income.
Countries with Gini coefficients between 0.2 and 0.35 are generally viewed as having equitable distribution of income, whereas countries with Gini coefficients from 0.5 to 0.7 are considered to have high inequality in income distribution. Most European countries and Canada have Gini coefficients varying from 0.2 to 0.36, while many African and Latin American countries have high values of Gini coefficients exceeding 0.45. Most Asian nations have Gini coefficients between 0.25 and 0.45 (United Nations 2005). Income inequality in the United States showed an upward trend over the past three decades, increasing from a Gini of 0.39 in 1970 to 0.46 in 2000.
One needs to be cautious about the national measures of Gini coefficients for they may obscure great variations in income inequality across sectors of the population within a country. In the United States, for example, minorities (African Americans and Latinos) have higher levels of income inequality than non-Hispanic whites (US Census Bureau 2005). The Gini coefficient is also useful in understanding the impact of economic development. For example, a nation may experience rapid economic growth and an increasing Gini coefficient simultaneously, indicating that income becomes less evenly distributed and thus inequality and poverty are not necessarily improving.
Bibliography:
- Lorenz, M. C. (1905) Methods of measuring the concentration of wealth. Journal of the American Statistical Association 9: 209—19.
- United Nations (2005) Human Development Reports: http://hdr.undp.org/en/reports/global/2005.
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