How is the Gini coefficient calculated?

The Gini coefficient is calculated by analyzing the Lorenz curve's deviation from the line of equality, which represents perfect income equality among individuals in a society. The Lorenz curve plots the cumulative share of income received by the bottom x% of the population against the cumulative share of the population. The area between the line of equality (where everyone has the same income) and the Lorenz curve reflects the degree of income inequality within the population.

To derive the Gini coefficient, you assess the area between the line of equality and the Lorenz curve and then relate it to the total area under the line of equality. The Gini coefficient will range from 0 (perfect equality) to 1 (perfect inequality). This measurement effectively captures the extent to which income distribution within a population deviates from perfect equality, making it a useful tool for economists to analyze income inequality.

Understanding this calculation highlights the importance of the Lorenz curve in visualizing income distribution and provides insights into societal economic disparities, which cannot be assessed by simply dividing total population by total income, measuring average incomes of specific groups, or measuring changes in price levels over time. These other approaches lack the capability to directly quantify income inequality in a comprehensive manner.