World Gini Coefficient

The coefficient ranges from 0 to 1, where:

• 0 corresponds to absolute equality (everyone has the same income);
• 1 (or 100%) corresponds to absolute inequality (one person receives all the income).

The coefficient is often multiplied by 100 for ease of interpretation and presented as a percentage (Gini index).

Calculation methodology

The calculation of the Gini coefficient is based on Lorenz curve - A graphical representation that shows the cumulative distribution of income among the population. The X-axis shows the percentage groups of the population (from poorest to richest) and the Y-axis shows the cumulative share of total income held by these groups.

Formula for calculation:

G = A / (A+B)​

Where:

• $G$ - Gini coefficient;
• $A$ - the area between the line of absolute equality and the Lorentz curve;
• $B$ - the area under the Lorentz curve.

Interpretation

The higher the value of the coefficient, the more unequally income is distributed in the country, and vice versa. Some threshold values:

• 0.2-0.3 (20-30%) - low level of inequality (characteristic of Scandinavian countries);
• 0.3-0.4 (30-40%) - moderate level of inequality (most developed countries);
• 0.4-0.5 (40-50%) - high levels of inequality (many developing countries);
• above 0.5 (from 50%) - critically high levels of inequality (some countries in Latin America and Africa).

Application

The Gini coefficient is used to:

• Estimates of economic inequality, for example, to analyze the differentiation of the population's money income.
• Comparisons of the distribution of a trait between different populations (e.g., different countries).
• Comparisons of the distribution of a trait across different population groups (e.g., Gini coefficient for rural versus urban populations).
• Tracking the dynamics of unevenness of distribution of a trait in the population at different stages.

The Gini coefficient allows us to compare the distribution of income between different populations, while being independent of the size of the economies of the countries being compared.

Limitations

Despite its usefulness, the Gini coefficient has disadvantages:

• Doesn't take into account the source of income. For a certain geographical unit (country, region, etc.) the Gini coefficient may be quite low, but at the same time some part of the population earns its income through labor and the other part through property.
• Comparison of countries with different income levels. High-income and low-income countries may have similar Gini coefficients due to misleading or distorted data on GDP and profits.
• Limitations in a planned economy. The Gini coefficient is not used to analyze states with planned economies, as income levels in such countries are regulated by the state and there is little gap between workers.
• Hiding distributional differences. The Gini coefficient cannot show how income is distributed within different population groups (e.g. between the poorest and the middle class).

Additionally

It may also be mentioned that the Gini coefficient is used not only to estimate income but also to analyze other distributions such as wealth distribution, access to education and health care, making it a versatile tool for analyzing inequality in different areas.