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Measuring Inequality

One measure of inequality is the Gini index, according to the World Bank, this measures the extent to which the distribution of income (or, in some cases, consumption expenditure) among individuals or households within an economy deviates from a perfectly equal distribution. A Lorenz curve plots the cumulative percentages of total income received against the cumulative number of recipients, starting with the poorest individual or household. The Gini index measures the area between the Lorenz curve and a hypothetical line of absolute equality, expressed as a percentage of the maximum area under the line. Thus a Gini index of 0 represents perfect equality, while an index of 100 implies perfect inequality.[1] The World Bank records variations in country’s Gini index, from 26.8 (2010) in Norway to 52.7 in Brazil (2012) and 57.5 in Zambia (2010). The United States had a Gini index of 41.1 in 2010, higher than the numbers for European countries. Gini numbers don’t tell the whole story, but they are a useful means of comparison between different countries, developing economies trend to have higher numbers and advanced economies, particularly those with an effective welfare system, trend to have lower numbers.

gini-index-comparisons

 

 

 

 

 

 

 

 

 

 

 

Gini Index – selected countries

The OECD calculated that between 1985 and 2005 inequality increased on average by over 2 Gini points for all 19 OECD countries, and that this change knocked “4.7 percentage points off cumulative growth in 1990-2010.”[2] The OECD’s calculations, “imply that, had inequality not changed between 1985 and 2005 (and holding all other variables constant), the average OECD country would have grown by nearly 33%”, rather than the actual figure of 28%.[3] The impact of inequality was also found to apply at a regional, as well as at a national level, there is no clear explanation for this process, but it is suggested that a failure to invest in education and development may be an important factor, according to the OECD, “Rising income inequality thus has a significant impact on economic growth, in large part because it reduces the capacity of the poorer segments – poorest 40% of the population, to be precise – to invest in their skills and education.”[4]

© Andrew Palmer, 2016, not to be reproduced

[1] The World Bank, http://data.worldbank.org/indicator/SI.POV.GINI

[2]  “In It Together: Why Less Inequality Benefits All”, OECD Publishing, Paris, 2015, doi: 10.1787/9789264235120-en, p.67

[3] “In It Together: Why Less Inequality Benefits All”, OECD Publishing, Paris, 2015, doi: 10.1787/9789264235120-en, p.67

[4] “In It Together: Why Less Inequality Benefits All”, OECD Publishing, Paris, 2015, doi: 10.1787/9789264235120-en, p.27

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