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.
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.
Sam.
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