What’s it: Gini coefficient is a statistic of economic inequality in a society. It tells you the distribution of income or wealth among individuals in an economy.
It is not an absolute measure of a country’s income or wealth. It just tells you how the income or wealth in the economy is spread out among the population.
Another term for the Gini coefficient is the Gini ratio or Gini index.
Calculate the Gini coefficient
There are two approaches to calculating the Gini coefficient: the direct method and the indirect method. Under the direct method, you can use the following Gini coefficient formula:
In the indirect approach, you can calculate the coefficient by dividing two areas of the Lorenz curve.
The relationship between the GINI coefficient and the Lorenz Curve
Under the indirect method, you need to construct the Lorenz curve first. The X-axis of the curve represents the cumulative percentage of the population by income, from lowest to highest. Meanwhile, the Y-axis represents the cumulative percentage of income earned. The result will be more or less as below.
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From this curve, you can calculate the Gini coefficient by dividing the area marked A by the area of the triangle (A + B).
GINI = A / (A + B)
How to read the Gini coefficient
The Gini ratio is between 0 and 1. Or, if you make it a percentage, it’s between 0% and 100%.
- The Gini coefficient = 0 indicates a perfect distribution of income or wealth. This means that each individual has precisely equal income or wealth.
- The Gini coefficient = 1 represents perfect inequality. This means that one person in a population controls all income, while the others earn nothing.
The values 0 and 1 are extreme, so they are impossible in the real world. The data show that the coefficients generally range from 0.24 to 0.63. In most EU countries, the Gini coefficient ranges from 0.22-0.37. In the United States, inequality was higher, with the Gini coefficient at 0.39 in 2017.
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Pros and cons of the Gini coefficient
The Gini ratio is the most widely used measure of economic inequality, including in Indonesia. But it also has some pros and cons.
Among the advantages of the Gini coefficient are:
- Easy to interpret. The coefficient is quite simple and is a single number. Therefore, you can easily draw conclusions.
- More representative for measuring inequality. That is, in contrast to income per capita or GDP per capita. Although both are single figures, per capita income can be very misleading. For example, a country may have a per capita income so high that you think it is rich. However, your conclusions can be missed. Per capita income doesn’t tell how many people are rich? Say, when you examine the Gini coefficient, maybe only 1% of the population controls nearly 90% of the income in the economy. So, only 1% are rich.
- Represents change for the entire population. The coefficient represents the change for the entire population. When it increases over time, income inequality is getting more acute, even though at the same time, the GDP per capita figure continues to rise.
Meanwhile, among the disadvantages of the Gini coefficient are:
- Depends on the validity of the sample. Different sampling techniques yield different numbers. Also, the sampling may be less representative hence results in inaccurate numbers.
- It doesn’t show you who they are and how rich they are. Although it measures distribution, the coefficient does not reveal the identity of high-income and low-income individuals in a population.
- It is relatively less comparable for comparisons between countries. The Gini coefficient doesn’t depend on how big the economy is or how rich a country is. Two countries, for example, a rich country and a poor country, may show the same coefficient because of the relatively similar distribution of income.
- Does not measure the quality of life. The population living in rural areas is likely to have a lower income than those who live in cities. However, they may not feel inadequate. They can take some food from nature without having to spend money. Also, the coefficient ignores the role of government welfare programs such as subsidized housing, health care, and education in supporting citizens’ living standards.
What to read next
- Economic Development: Meaning, Goals, and Stages
- Economic Growth: Factors, Importance, Impacts, How to Measure It
- Income Distribution: How to Measure and Overcome Inequality
- Human Development Index: Indicators, Ranking, Benefits, Limitations
- Gini Coefficient: Meaning, Calculation Method, Data, Pros, and Cons
- Economic Growth and Economic Development: Their Differences and Relationships