Business, Legal & Accounting Glossary
Gini coefficient refers to the variance in poverty and wealth in any given country. On a scale of 0 to 1, the lower the Gini coefficient, the more evenly distributed the wealth.
Gini coefficient or Gini index is an economic measure of inequality in income distribution. Gini coefficient is specified as a ratio between 0 and 1. A society that tallies 0.0 on the Gini scale is said to possess perfect equality in income distribution. A society with a score of 1 suggests total inequality. Gini coefficient expects that no person in a society has negative wealth or net income. The coefficient is named after its inventor, the Italian statistician Corrado Gini (23rd May 1884 – 13th March 1965).
Gini coefficient is expressed as a ratio of areas in the Lorenz curve diagram.
G = 1- 2 ∫ L(X)dX, where the definite integral ranges from 0 to 1
The area between the Lorenz curve and the line of perfect equality (DE) is B. The area beneath the Lorenz curve is C. Lorenz curve is expressed by the function Y= L(X). Gini coefficient is given by B / (B+ C)
Poor and developing countries tend to possess greater Gini indices; the range generally varies between 40 and 65. Extremes are calculated at 25 and 71. Developed countries like the European states generally score between, with Gini indices lying between 24 and 36.
The principal advantage of the Gini index is that it assesses inequality using ratio analysis. This is unlike the variable population representatives like Gross Domestic Product (GDP) and per capita income. Gini coefficient can be employed to compare the distribution of income across dissimilar population groupings. It can also be used to illustrate the modification of income distribution over time. Gini index brings to light whether the income inequality in a given population is decreasing or increasing.
Gini coefficient also suffers from a few disadvantages. The index of unlike sets of persons cannot be averaged to find the Gini coefficient of the total population on the sets. A coefficient for each individual will result in a value of zero. A big state with a diverse economic map will result in a much higher Gini index compared to calculations of each region within that country. Lorenz curve may downplay the real inequality amount if richer households are capable of using money more efficiently. Countries having similar incomes may exhibit similar Gini coefficients even if they have dissimilar distributions of income. This is due to the fact that Lorenz curves may show unlike shapes and still exhibit alike Gini coefficient.
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This glossary post was last updated: 27th March, 2020 | 2 Views.