Macroeconomics For Dummies®, uk edition Published by: John Wiley & Sons, Ltd

Recognising levels of inequality: The Gini coefficient

Related to the idea that a country can have a high average GDP per capita but low living standards for large numbers of people is inequality: how evenly a country’s wealth/income is distributed across people. Inequality isn’t necessarily ‘bad’: in fact, most economists think that some level of inequality is inevitable and indeed desirable if people are to exert effort in the workplace and in their studies. Nevertheless, very high levels of inequality are almost

universally seen as undesirable.


The Gini coefficient is a numerical measure for the ‘amount of inequality’ present in a country. It’s always a number between 0 and 1. A Gini coefficient of zero represents the case of perfect equality where everyone has the same income. As the Gini coefficient increases, incomes become more unequal until the Gini coefficient reaches a value of 1, which represents perfect inequality, that is, one person has everything. Of course, no countries score exactly zero or one, but some are more unequal than others. South Africa, for example, has a Gini coefficient of around 0.63, the UK is less unequal at around 0.35 and Scandinavian countries such as Denmark are even less unequal at around 0.25.

But where do these numbers come from? How are they calculated? Figure 4-5 shows the Lorenz curve for a hypothetical economy – a graphical representation of how income is distributed. On the horizontal axis is the percentage of households (ordered from poorest to richest). On the vertical axis is the percentage of the economy’s income (or GDP) earned by that group. So, for example, point x on the Lorenz curve tells you that the poorest 50 per cent of households took home 25 per cent of the total income.

© John Wiley & Sons


Figure 4-5: The Lorenz curve.

The Lorenz curve must always go through the points (0,0) and (1,1), because by definition the ‘poorest 0 per cent of households’ (no one) must get nothing while the ‘poorest 100 per cent of households’ (everyone) must get everything.

When you have the Lorenz curve for an economy, you can calculate how unequal it is by comparing it to the situation where everyone has an equal share – represented by the ‘line of equality’ in Figure 4-5. The closer the Lorenz curve is to the line of equality, the more equally income is distributed. The Gini coefficient is a numerical measure for how ‘close’ the Lorenz curve is to the line of equality:

A and B are the areas above and below the Lorenz curve, respectively.

The Gini coefficient is a useful and widely used measure of inequality. Its strength is that it gives you a single figure that summarises the level of inequality in a country and allows comparisons across countries and across time. For example, both UK and US inequality has risen over the past 30 years and, as you would expect, so has the Gini coefficient.

Chapter 5