An introduction to the distribution of income and wealth

[This was covered in "Markets: Why Markets Can Fail" as one reason why markets do not work perfectly and is repeated here as a reminder].

Measuring the distribution of income

The Lorenz curve

We can show the degree of inequality in income distribution in a diagram. If 10 per cent of families have 10 per cent of the income, and 20 per cent have 20 per cent, and so on, we have perfect equality.

The Lorenz curve shows the actual difference from the 45 degree line of perfect equality. We see an inequality gap!

Here, we see that about 60% of the families have only 25% of the income.

The Gini Coefficient is a more accurate measure than the Lorenz curve - and frankly it is much easier to compare numbers than pictures!

The Gini Coefficient measures the degree of inequality by using numbers – it is calculated as:

Area between the diagonal line and the Lorenz curve
Triangular area under diagonal line

i.e., this is the inequality gap as a proportion of the whole triangle. The bigger the inequality gap, the closer it gets to the whole; eventually it is the same as the whole and a number divided by the same number always equals one. So the higher the Gini coefficient, the less equal is the distribution of income.

Perfect equality = 0.0
Perfect inequality = 1.0

Actual Gini Coefficient figures for three countries

  1980 1994
UK 0.327 0.345
Spain 0.397 0.340
France 0.417 0.290

Using these figures, rather than trying to compare by eye some three separate diagrams, we can now compare easily.

We can see that:
• In 1980, the income distribution in the UK is more equal than in Spain.
• The UK’s income distribution got less equal (under the Thatcher government).

• Spain’s income distribution got more equal over the period.
• By 1994, Spain had a more equal income distribution than the UK.
• And France, which in 1980 had less equality, is revealed to a more equal income distribution in 1994 than either of the other two countries!

This is the sort of thing that the Gini coefficient is used for.

Latin America has the highest Gini coefficients of any of the continents in the world (that is, it has the widest income disparities). That might be a useful statement you could make to establish you really know about the issue.

The Gini Coefficient can easily be set in exams, either as an essay or as data response.