Friday, 12 April 2013

Lorenz Curve and Gini Coefficient

These two concepts are used in conjunction with one another to measure the distribution of something you're interested in. The most used example is for the distribution of income, but it can be applied to anything.

Lorenz Curve

The diagonal line is the line of complete equality between national income on the Y axis and population on the X axis. Area A on the diagram shows the inequality, the Gini coefficient puts a value on this area. The Gini coefficient is calculated by the following: A / (A+B). It takes the area of A as a proportion of the whole area under the line of perfect equality. The value of the Gini coefficient can range from 0 to 1. 0 Being complete equality and 1 being complete inequality.

If we have two Lorenz curves that do not intersect and the coefficient increases then we can see there has been an increase in inequality. If the two curves do intersect, even if there is a change in the Gini coefficient we cannot say for sure what has happened to inequality by just looking at the coefficient. We need to look at the shape of the curves and where they cross to get an accurate representation of the change. That is one limitation of the Gini coefficient.

Short but sweet. Cheers guys, over and out.

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