Measuring Inequality
Measuring inequality: Using the Lorenz Curve and Gini Coefficient
1. Introduction
Almost thirty years ago, the author of this brief attended a lecture addressing the economics of inequality. At the start, the class was invited to imagine the implications of individual wealth being reflected in our personal height. Assume that by government decree, everyone has to march past a fixed point over the period of one hour, starting with the smallest people and ending with the largest. The parade would begin with all the people who owed money. They would march underground. Even after 20 minutes, marchers would be invisible since they had no wealth.
At the half way point, the parade would comprise of dwarves, little more than a few centimetres in height. Only 12 minutes before the end of the parade would people start to be of an average height and hence, of average wealth. In the last few minutes of the parade, marchers would evolve rapidly into giants, assuming heights of several metres. The heads of the last few participants would be invisible since their height would be measured in kilometres rather than metres.
The moral, of what seems to be a trivial example, is that despite increases in living standards, wealth is not distributed evenly through society. The vast majority is owned by the very few.
The degree to which the inequality depicted in the parade of dwarves and giants is undesirable is a normative issue. Commentators concerned with poverty levels in society will argue that one of the major roles of government should involve some degree of re-distribution. If a government is to play a role in such a process, then it needs to be informed about the distribution of wealth (which is a stock and can include a range of assets that include shares, land, houses as well as money) and the distribution of national income (which is a flow since it is paid per week, month, year etc).
The terms wealth and income should not be used interchangeably. The
1. Introduction
Almost thirty years ago, the author of this brief attended a lecture addressing the economics of inequality. At the start, the class was invited to imagine the implications of individual wealth being reflected in our personal height. Assume that by government decree, everyone has to march past a fixed point over the period of one hour, starting with the smallest people and ending with the largest. The parade would begin with all the people who owed money. They would march underground. Even after 20 minutes, marchers would be invisible since they had no wealth.
At the half way point, the parade would comprise of dwarves, little more than a few centimetres in height. Only 12 minutes before the end of the parade would people start to be of an average height and hence, of average wealth. In the last few minutes of the parade, marchers would evolve rapidly into giants, assuming heights of several metres. The heads of the last few participants would be invisible since their height would be measured in kilometres rather than metres.
The moral, of what seems to be a trivial example, is that despite increases in living standards, wealth is not distributed evenly through society. The vast majority is owned by the very few.
The degree to which the inequality depicted in the parade of dwarves and giants is undesirable is a normative issue. Commentators concerned with poverty levels in society will argue that one of the major roles of government should involve some degree of re-distribution. If a government is to play a role in such a process, then it needs to be informed about the distribution of wealth (which is a stock and can include a range of assets that include shares, land, houses as well as money) and the distribution of national income (which is a flow since it is paid per week, month, year etc).
The terms wealth and income should not be used interchangeably. The