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Measuring the Income Distribution

• Describing the income distribution.

• The Lorenz Curve.

• The Gini coefficient.

• Empirical evidence on the income distribution.

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Figure 5.1: A Graphic Illustration of the Income Distribution

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Gini Coefficient• The Gini Coefficient is derived by comparing the Lorenz

curve to the line of perfect equality.

• The Gini coefficient takes on a value between zero and one (inclusive). The more unequal the income distribution, the higher the value of the Gini coefficient.

• If we denote the area between the Lorenz curve and the line of perfect equality as A, the Gini coefficient is G=2A.

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Gini Coefficient

• Notice that if the income distribution is perfectly equal and the Lorenz curve follows the line of perfect equality, the area A=0, hence G=0. The Gini coefficient takes on the value of zero when the income distribution is equal.

• On the other hand, if the income distribution is perfectly unequal, Bill Gates has it all, the Gini coefficient is G=1.

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