Gini Coefficient, also called the Gini Index, is a well-known statistical measure of income inequality in a country or given population. It measures the dispersion of income or wealth among members of the population and is used by the World Bank to understand income inequality across the world.
Although calculating the Gini Coefficient is highly straightforward, many may find it complicated. In this blog, we will explain how the Gini Coefficient is calculated and provide some interesting facts on how it is used. Excited? Let's get started.
Understanding Gini Coefficient
Named after the Italian statistician and sociologist Corrado Gini, who developed this coefficient in 1912, Gini Coefficient is a measure of the demographic distribution of income in a nation or population.
It defines the disparity as:
- An indication of perfect equality is if the value is an absolute zero (everyone in the country has the same wealth/income), while the highest inequality is if the value is 1 (one person owns all the wealth or generates all the income in the country)
- A value less than 0.2 represents perfect income equality
- The value between 0.2 - 0.3 represents relative equality
- The value 0.3 - 0.4 expresses adequate equality
- The value of 0.4 - 0.5 suggests a big income gap
- A value over 0.5 represents a severe income gap
How can we calculate Gini Coefficient?
Gini Coefficient is defined mathematically based on the Lorenz curve, which plots the proportion of the total income of a population on the Y-axis and the cumulative earnings of the bottom % of the population on the X-axis.
It is calculated as the ratio of the area that lies between the line of equality (45 degrees) and the Lorenz curve (marked A and B in the diagram).
Principles of Gini Coefficient
Even today, Gini Coefficient is one of the most popular ways to calculate economic inequality due to key principles that are:
- The anonymity of the individuals in the population
- It is independent of country size, population, or other factors and provides unbiased income distribution
- Transfer principle - Gini Coefficient can also help us understand when income is transferred from the right to the poor
We hope this article was helpful to understand in simple terms what Gini Coefficient is and how it works. Gini Coefficient is important as it helps us clearly and in simplistic terms identify high levels of income inequality, which can be due to several economic and political factors.
FAQs on Gini Coefficient
Q.1. How is Gini Coefficient calculated?
The Gini Coefficient is the area between the Lorenz curve of the income distribution, where the Y-axis is the population's total income, and the X-axis is the cumulatively earned income of the bottom section of the population.
Q.2. What is a Good Gini Coefficient?
The ideal Gini Coefficient should be an absolute zero (0%), with no income equality in the country or the population. However, if one person in a population earned all the income in the nation and the rest earned zero, the Gini score will be 1 (100%). Gini index 0.2 represents perfect income equality, while anything above 0.5 represents a severe income gap.
Q.3. Which are the top 5 countries with the lowest Gini Coefficient?
Q.4. Which are the top 5 countries with the lowest Gini Coefficient?
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Q.5. What is the Gini Coefficient of India in 2020?
According to the World Bank, the Gini Coefficient of India is 35.7.