Gini Index: Measuring income distribution

Imagine a small country, no bigger than your community, with $100 billion in assets. Judging from this information alone, this sounds like a good place to live. It sounds better when you learn that only four people live there-until you find out that three of them have a net worth of $0. Income distribution is the missing factor in the preliminary assessment. The Gini coefficient is specifically designed to measure this factor, and it has an impact on a country’s economic health and national policies. This article will show you how to interpret and apply the Gini Index.

Explain the Gini coefficient

The index is based on the Gini coefficient, which is a measure of statistical dispersion that ranks income distribution on a scale of 0 to 1. This metric has been in use since it was developed by the Italian statistician Corrado Gini in 1921. It can be used to measure inequality in any distribution, but it is usually related to wealth.

In the example mentioned above, the Gini index reads 1, which indicates complete inequality. If everyone has exactly the same amount, the index will read 0. This number can be multiplied by 100 to express it as a percentage.

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The Gini coefficient of a country is usually displayed intuitively using a graph called the Lorentz curve, as shown below. Show the population as a percentage of total income on the x-axis (y-axis).

Example of Lorentz curve.

Gini in the real world

The statistics of the “World Fact Sheet” produced by the CIA quoted a range of approximately 0.22 to 0.63. Europe usually publishes relatively low numbers. It is approximately 0.32 (2016) in the United Kingdom and 0.41 (2016) in the United States.

Although low numbers represent greater equality, low numbers are not always a perfect indicator of economic health. Countries such as Sweden, Belgium, and Iceland all gathered in the 0.20s, as did many countries in the former Soviet Union. In the former country, the numbers are close because residents generally have a higher standard of living, while in the latter, the close numbers indicate that poverty is relatively evenly distributed.

Even in rich countries, the Gini index measures net income, not net assets. Therefore, even if income distribution is relatively equal, most of a country’s wealth can still be concentrated in the hands of a few people. For example, considering that large holdings of non-dividend-paying stocks may bring individuals low income but high net worth.

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Wealth inequality, World Bank.

Follow the trend

Viewing a single number can provide a map of the distribution at a given point in time, while tracking trends can provide a map of the country’s heading. For example, in the United States, this number is rising and has been going on for more than thirty years. The rich are really getting richer. This trend is reflected in the disappearance of the middle class, because income distribution increases at the top of the scale, forcing the middle class to move to the lower end of the scale.

Impact on national policy

The Gini Index can help countries track poverty levels. Noting that the income distribution in a country is becoming increasingly unequal allows government officials to study the issue in depth and determine its cause. In addition, the Gini index can be compared with gross domestic product (GDP) data. If GDP increases, some people think it means that the people of a country do better. However, if the Gini index is also rising, it indicates that the income of the majority of the population may not have increased. In the case of income inequality, the government sometimes redistributes wealth through social programs and tax policies.

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Bottom line

At first glance, the Gini index seems to be a fairly abstract indicator, but in many cases, net income has a direct impact on the quality of life. Looking at some of the poorest areas in the world, we can get a glimpse of the slums and poverty that few of us want to experience firsthand, in sharp contrast with the living conditions of the rich.

If the gap between the rich and the poor continues to widen, the evaluation of this income gap is likely to become more important. Understanding the Gini index is not a panacea, but the measure does provide a way to quantify and track the direction of social development, which may open the door to dialogue and potential solutions.

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