- Since achieving equity is a desirable outcome for the economy, measuring the income and wealth inequalities present in it is essential.
- There are two main tools economists use to measure and display income and wealth inequalities:
- The Lorenz curve.
- The Gini coefficient.
Note
Note that in theory the income shares can be divided into any percentage, depending on the needs.
The Lorenz curve
Definition
Lorenz curve
A graphical representation of the income inequality within an economy.
An economy's population can be divided into income quintiles:
- Income quintiles divide an economy's population into groups of 20% of the population, ordered from poorest (least income-earners) to richest (highest income-earners).
- The economy's population is therefore divided into five quintiles (five 20%), ranging from the poorest 20% to the richest 20%.
- This way, it can be seen how different is the income distributed within a country (Table 1).
| Quintile | Poorest 20% | Second 20% | Third 20% | Fourth 20% | Richest 20% |
|---|---|---|---|---|---|
| % of Total Income | 5% | 10% | 15% | 20% | 50% |
| Income Decimal Index | 0.05 | 0.1 | 0.15 | 0.2 | 0.5 |
- Table 1 above shows how:
- The poorest 20% only earns 5% of the total income.
- The second 20% earns 10% of the total income.
- The third 20% earns 15% of the total income.
- The fourth 20% earns 20% of the total income.
- The richest 20% earns 50% of the total income (half of the economy's income is earned by the top 20% the population).
- The Lorenz curve (Figure 1) can be used to represent this data:
A Lorenz curve represents the income inequality of an economy in the following way:
- Axis representation of population and income:
