Gini coefficient (economics)
The Gini coefficient, also known as the Gini index, is a statistical measure used to quantify income inequality within a society. Developed by Italian statistician Corrado Gini in 1912, it offers a comparison of income distribution against a hypothetical scenario where every citizen earns the same amount. The coefficient ranges from 0 to 1, with 0 indicating perfect income equality and 1 indicating extreme inequality. The Gini index is calculated based on the Lorenz curve, which visually represents the distribution of income across different segments of the population.
While the Gini coefficient is widely used by organizations such as the United Nations and the OECD to assess income distribution globally, it primarily focuses on income rather than wealth. Notably, the index can yield values greater than 1 in cases where a significant portion of the population has negative income. Different countries exhibit varying levels of income inequality, with South Africa reported to have one of the highest Gini values at 0.67 as of 2023, while Slovakia displays one of the lowest in Europe at 0.212. Although the Gini coefficient serves as a valuable tool for analyzing income disparity, it has limitations, as it may not fully capture the complexities of economic conditions, particularly in unique local contexts.
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Gini coefficient (economics)
The Gini coefficient is a statistical tool used to measure the degree of income inequality in a society. The measure, also called the Gini index, was developed in the early twentieth century and compares the distribution of income in a society to a hypothetical society in which each citizen earns the same amount. The index is calculated on a scale between 0 and 1, with 0 representing a perfectly equal distribution of income and 1 representing a perfectly unequal distribution of income.
The index measures the distribution of income in a society and not the amount of wealth. Income is considered to be the amount of disposable income a household earns in a year. Wealth is the total net worth of a household. In the twenty-first century, the Gini coefficient is used by organizations such as the United Nations (UN), the United States Census Bureau, and the Organisation for Economic Co-operation and Development (OECD) to monitor income distribution across the world.
Background
The Gini coefficient was developed in 1912 by Italian statistician Corrado Gini. At the time, Gini was the head of statistics at the University of Caligari in Sardinia, Italy. He based his calculations on the Lorenz curve, a graphic representation of income distribution developed by American economist Max Lorenz in 1905. The Lorenz curve plots the percentile of the population based on income on the horizontal, or x-axis, of a graph. It plots the total income of the population on the vertical, or y-axis. For example, if the x-axis had a value of 50 and the y-axis had a value of 20, it would indicate that the lowest 50 percent of the population controls 20 percent of that society's total income.
The Gini coefficient is calculated by determining the line of perfect income equality, which is represented by a straight line with a value of 0.5. The line of perfect equality and the Lorenz curve are both plotted on the graph. The value of the Gini index is the area on the graph below the line of perfect equality minus the area below the Lorenz curve divided by the area below perfect equality. This calculation also corresponds to a value double the area between the Lorenz curve and the line of perfect equality. The Gini coefficient provides a value of the statistical distance from perfect equality.
The values of the Gini index are presented in values between 0 and 1. A 0 represents a society in which all people earn an equal amount; a 1 represents a society in which one person earns all the income. The Gini coefficient can produce values greater than 1 if a large number of people in the society have a negative income.
For instance, a nation with Lorenz curve values of 47 on the x-axis and 10.46 on the y-axis would have a total area of about 0.2 below the curve. That value subtracted from 0.5 yields 0.3. When that figure is divided by 0.5, the result is 0.6, a relatively high level of income inequality. A nation with a Gini index value of 0.4 would be considered to have income distribution at a more even level. The Gini value also can be represented as a percentage, with 0.6 translating to 60 percent.
Economists consider the Gini coefficient to be a relatively reliable guide on income inequality, but they also recognize the method's drawbacks. Because it measures income as a statistic, the index may not present a complete picture of economic reality. For example, a college town may score high on the Gini index, seemingly showing a high percentage of income concentrated in the hands of a relative few. However, the index will not indicate that much of the income is earned by college professors, while the majority of the town's residents are full-time students earning part-time incomes. Further complicating the calculation is that many of the students may have college loans, resulting in a negative income.
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The Paris-based Organisation for Economic Co-operation and Development compiles Gini index information for its member nations. In 2023, South Africa had the highest level of income inequality, with a Gini value of .67. Other countries with historically high Gini coefficients include the United Arab Emirates, Brazil, Saudia Arabia, Costa Rica, and Chile. In 2022, Slovakia had the most equal income distribution, with the lowest Gini coefficient in Europe at 21.2. Other nations with historically high levels of income equality include Denmark, Switzerland, Germany, Belgium, Norway, Finland, Austria, and Sweden.
Figures from the US Census Bureau indicate income inequality has been rising in the United States since the mid-1900s. According to OECD figures, the nation had a Gini value of 0.362 in 1967, which rose to 0.467 by 2014 and 0.48 by 2022. Though Gini values have increased consistently, small improvements have been observed in some years. In 2022, the United States Gini value decreased for the first time since 2007. Gini index values calculated before taxes are removed from income tend to be higher. These values do not consider the distribution of tax revenues through programs such as Social Security, Supplemental Nutrition Assistance Program funds, and unemployment benefits. For example, according to the OECD, the United States had a pretax Gini value of 0.509 in 2013. That was reduced to 0.401 after taxes were removed.
Bibliography
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