Lorenz Curve Definition & Examples

Published Oct 25, 2023

Definition of Lorenz Curve

The Lorenz Curve is a graphical representation that illustrates income inequality within a specific population. It plots the cumulative share of income received by each segment of the population on the horizontal axis against the corresponding cumulative share of the population on the vertical axis. The curve is used to visually analyze the distribution of wealth or income and to compare it with a hypothetical perfectly equal distribution.

Example

Let’s consider a country with a population of 100 individuals. To simplify the example, assume that each person earns $1,000 per month. In a perfectly equal distribution, each individual would have the same income, resulting in a straight diagonal line on the Lorenz Curve. However, in reality, income inequality exists.

In this country, the top 1% of the population earns 20% of the total income, the top 10% earns 40%, and the top 20% earns 60%. The Lorenz Curve representation would show that the cumulative share of income for the top 20% is 60% on the horizontal axis, and the cumulative share of the population is 20% on the vertical axis. As we move along the curve to the right, the cumulative share of income increases while the cumulative share of the population remains constant.

In contrast, if the income was distributed equally, the Lorenz Curve would be a straight diagonal line, indicating that each segment of the population receives its proportionate share of income.

Why Lorenz Curve Matters

The Lorenz Curve is a valuable tool for understanding income distribution and wealth inequality within a population. By visually representing the disparities in income, policymakers, economists, and social scientists can analyze and address issues related to income inequality. It helps to identify the segments of the population that are disproportionately benefiting or suffering from unequal distribution, and informs the formulation of policies and interventions aimed at reducing inequality and promoting economic and social justice.