Chapter 10. Lorenz Curve and Gini Coefficient Measure distribution of thing your interested in. E.g....
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Transcript of Chapter 10. Lorenz Curve and Gini Coefficient Measure distribution of thing your interested in. E.g....
Chapter 10Chapter 10
Lorenz Curve and Gini Lorenz Curve and Gini CoefficientCoefficient
• Measure distribution of thing your interested in.
• E.g. Share of largest firms in an oligopolistic industry,
e.g share of top eight, sixteen etcdistribution of income in an economy
– Work with example of Distribution of Income
• Measure distribution of thing your interested in.
• E.g. Share of largest firms in an oligopolistic industry,
e.g share of top eight, sixteen etcdistribution of income in an economy
– Work with example of Distribution of Income
Lorenz curveLorenz curve
O
100
O 10020 40 60 80
20
40
60
80
Line of completeequality
Pe
rce
nta
ge
sh
are
of
nat
ion
al i
nco
me
(cu
mul
ativ
e)
Percentage of population
INEQUALITY AND POVERTYINEQUALITY AND POVERTY
• Distribution in the UK
– size distribution
– Looking at Quintile Groups:
Divide population into 5 equal groups (by number of people)
• Distribution in the UK
– size distribution
– Looking at Quintile Groups:
Divide population into 5 equal groups (by number of people)
Size distribution of UK income bySize distribution of UK income byquintile group of households: 1997/8quintile group of households: 1997/8
Bottom20%
Next 20%
Middle20%
Next 20%
Top20%
15%15%
25%25%
51%51%
7%7%
2%2%
Income Income beforebeforetaxes and benefitstaxes and benefits
Size distribution of UK income bySize distribution of UK income byquintile group of households: 1997/8quintile group of households: 1997/8
Bottom20%
Next 20%
Middle20%
Next 20%
Top20%
15%15%
25%25%
51%51%
7%7%
2%2%
Bottom20%
Next 20%
Middle20%
Next 20%
Top20%
11%11%
16%16%
22%22%
44%44%
7%7%
Income Income beforebeforetaxes and benefitstaxes and benefits
Income Income afteraftertaxes and benefitstaxes and benefits
O
100
O 10020 40 60 80
20
40
60
80
Line of completeequality
Lorenz curve
Pe
rce
nta
ge
sh
are
of
nat
ion
al i
nco
me
(cu
mul
ativ
e)
Percentage of population
Lorenz curveLorenz curve
INEQUALITY AND POVERTYINEQUALITY AND POVERTY
• Measuring the size distribution of income– Lorenz curves
– Gini coefficients
• Measuring the size distribution of income– Lorenz curves
– Gini coefficients
Lorenz curve and Gini coefficientLorenz curve and Gini coefficient
O
100
O 10020 40 60 80
20
40
60
80
Line of completeequality
Lorenz curve
A
BPe
rce
nta
ge
sh
are
of
nat
ion
al i
nco
me
(cu
mul
ativ
e)
Percentage of population
Gini coefficient = A / (A + B)Gini coefficient = A / (A + B)
Gini coefficientGini coefficient
Gini=0: Complete equalityGini=0: Complete equality
Gini=1: Complete inequalityGini=1: Complete inequality
If the Gini coefficient increases, will If the Gini coefficient increases, will inequality always have increased ? inequality always have increased ? Answer: We can’t say for sure…Answer: We can’t say for sure…
Inequality higher and Gini coefficient higherInequality higher and Gini coefficient higher
O
100
O 10020 40 60 80
20
40
60
80
Line of completeequality
Pe
rce
nta
ge
sh
are
of
nat
ion
al i
nco
me
(cu
mul
ativ
e)
Percentage of population
L1
L2
Uncertain, poor worse off, higher incomes more Uncertain, poor worse off, higher incomes more evenly spread. Gini Coefficient ?evenly spread. Gini Coefficient ?
O
100
O 10020 40 60 80
20
40
60
80
Line of completeequality
Pe
rce
nta
ge
sh
are
of
nat
ion
al i
nco
me
(cu
mul
ativ
e)
Percentage of population
L1
L2
Gini and LorentzGini and Lorentz
If the Lorentz curves “before” and “after” do If the Lorentz curves “before” and “after” do not intersect and the Gini coefficient goes not intersect and the Gini coefficient goes up, THEN there is an increase in inequality.up, THEN there is an increase in inequality.
But if the Lorentz curves intersect, we cannot But if the Lorentz curves intersect, we cannot say for sure what happened to inequality say for sure what happened to inequality upon observing (only) that the Gini went upon observing (only) that the Gini went up.up.
