Why is the Gini coefficient used to measure inequality?

The Gini coefficient is used to measure inequality because it quantifies the dispersion of income or distribution of wealth among a population.

The Gini coefficient, named after the Italian statistician Corrado Gini, is a statistical measure that is used to gauge economic inequality within a population. It is a number between 0 and 1, where 0 corresponds to perfect equality (everyone has the same income) and 1 corresponds to perfect inequality (one person has all the income, while everyone else has none).

The Gini coefficient is derived from the Lorenz curve, a cumulative frequency curve that compares the distribution of a specific variable (like income or wealth) with the uniform distribution that represents equality. The Gini coefficient is the area between the Lorenz curve and the uniform distribution curve, expressed as a proportion of the total area under the uniform distribution curve.

The Gini coefficient is widely used because it is a single number that summarises the degree of inequality in a distribution. It is easy to understand and interpret, and it allows for straightforward comparisons across countries or over time. It is also sensitive to changes in the middle of the income distribution, which is often where policy interventions are targeted.

However, the Gini coefficient also has its limitations. It is a relative measure of inequality and does not capture absolute differences in income or wealth. It is also insensitive to changes at the extremes of the distribution, which means it may not fully reflect the degree of poverty or wealth concentration. Furthermore, it does not provide information about the sources of inequality, such as differences in education, skills, or opportunities.

Despite these limitations, the Gini coefficient remains a valuable tool for economists and policymakers. It provides a simple, quantitative measure of inequality that can be used to track changes over time, compare different countries or regions, and evaluate the impact of economic policies. Understanding the Gini coefficient and its implications is therefore crucial for anyone studying economics, particularly at the IB level.