Gini Index

Published Oct 25, 2023

Definition of Gini Index

The Gini Index, also known as the Gini coefficient, is a measure of income inequality within a population. It quantifies the extent to which the distribution of income among individuals or households deviates from a perfectly equal distribution. The index ranges from 0 to 1, with 0 indicating perfect equality (all individuals have the same income) and 1 indicating perfect inequality (one individual has all the income).

Example

To understand the Gini Index, consider a country with five individuals and their respective incomes: A earns $10,000, B earns $25,000, C earns $50,000, D earns $70,000, and E earns $100,000. The total income in this society is $255,000.

To calculate the Gini Index, start by arranging the incomes in ascending order: $10,000, $25,000, $50,000, $70,000, and $100,000. Next, calculate the cumulative share of income for each individual.

Individual A’s cumulative share is $10,000 / $255,000 = 0.039, B’s cumulative share is ($10,000 + $25,000) / $255,000 = 0.137, C’s cumulative share is ($10,000 + $25,000 + $50,000) / $255,000 = 0.333, D’s cumulative share is ($10,000 + $25,000 + $50,000 + $70,000) / $255,000 = 0.627, and E’s cumulative share is 1 (as E has all the income).

Next, plot the Lorenz curve, which is a graphical representation of the income distribution. The Lorenz curve shows the cumulative share of income on the y-axis and the cumulative share of the population on the x-axis.

The Gini Index is calculated by finding the area between the Lorenz curve and the line of perfect equality (the diagonal line connecting the origin and the point [1, 1]). In this case, the Gini Index is approximately 0.24.

Why the Gini Index Matters

The Gini Index provides valuable insights into income inequality within a population. It helps policymakers, economists, and social scientists assess the fairness and social implications of income distribution. Understanding income inequality is essential for designing effective policies to reduce poverty, promote economic growth, and create an equitable society. The Gini Index allows for comparisons across different countries or regions and provides a measure of progress or regression in addressing income inequality over time.