Gini Coefficient

Video Transcription

Hi, welcome to macroeconomics. This is Kate. This tutorial is on the Gini coefficient. As always, my key terms are in red, and examples are in green.

In this tutorial, we'll talk about what the Gini coefficient measures, and how it's calculated. You'll understand how the Lorenz curve relates to the Gini coefficients. And we'll also be applying these concepts to income inequality in the United States and in other nations.

Let's think about capitalism and income inequality or income inequality. Obviously an underlying principle of capitalism is that it provides incentive to work harder. If you want to improve your situation, you'll be rewarded by advancing yourself and working harder.

Because of that, most Americans do not believe in 100% income inequality, meaning everyone earns the same amount. That's why most Americans hate the idea of communism or socialism, where in theory everybody has the same amount. We like the idea that there's opportunity for everybody to advance themselves in a capitalist economic system.

However, most people also agree that a huge disparity between the rich and poor is also not ideal. And most recognize a healthy economy thrives when there's a strong healthy middle class. So measuring the extent of income inequality in a country is something that economists do. And what they use is the Gini coefficient.

The Gini coefficient is just simply a measure of income inequality. It's going to range from 0 to 1. And at zero, the Gini is going to exhibit perfect income equality, meaning everyone would have the same. And at 1, the Gini would exhibit perfect income inequality, meaning one person basically earns all of the income in a country.

So like I said, the coefficient will range from 0 to 1. And the lower the coefficient, the more equal income is distributed in a country. The higher the coefficient-- the closer it gets to 1-- the more income is inequal, or there's more income inequality in a country.

Here's one way to think about it. If we were to line everyone up in our country, from the poorest person to the very wealthiest, and then we'd stack their income in front of them, we would get a visual image. And actually, as I was doing the research for this tutorial, I came across a recent YouTube video clip.

It's called Wealth Inequality in America. It's similar, wealth is similar to income, but just includes also savings and things like that. It actually did visually show this way of looking at it. So I figured I would borrow-- they said that we could share this with anybody.

So here is the visual. See, we're lining everybody up, and we're putting all their money in front of them. So if everyone were to have the exact same amount of money, that would mean that the bottom 10% has 10% of the income. The bottom 50% has 50% of the income. That basically everybody would have the same amount of money, and that's what it would look like.

The difference between these two numbers then is nothing. There is no difference. The bottom 10% is 10, the bottom 20% is 20, and so on and so forth.

We know, though, that's certainly not the case in most countries. We know that everyone does not have the same amount of money. Here's just-- they were just saying what Americans chose as an ideal distribution, but I just wanted to show you. It would obviously look different as there is income inequality.

So let's say that the bottom 20% of our population has only 5% of the overall income. And maybe the bottom 60% has only 30% of the income. See now, there is a difference between these numbers. That means that as we move up, people are making more and more money.

So this is what the Gini coefficient actually measures. It's measuring the difference between these two figures, and it's averaging them and it uses calculus to do this. It averages these statistics over the entire population distribution to come up with a coefficient.

I'm going to show you this, actually, on the Lorenz curve. The Lorenz curve is a graphical depiction of the inequality, measured by the Gini coefficient. The first step in constructing a Lorenz curve is to make a 45 degree line.

Here we have percentage of income and percentage of families. What that 45 degree line shows is perfect incoming equality, because it's showing you just what I did on that first visual image. The bottom 20% of families have 20% of the income, the bottom 40% have 40, 60% have 60. That's the significance of the 45 degree line.

Then we plot the actual distribution in a country, and that is represented by this blue curve, right here. So if all of the income in a country was actually earned by one person, so perfect income inequality, that would look like this right here. Because only one person would have 100% of the income, and up until that, there would be zero income earned by all of these people. So that's important to keep in mind.

Along the 45 degree line, there is no difference at all between these numbers. But as you can see, more likely there is some kind of curve here. So the idea is the closer that this curve gets to that 45 degree line, the more income is equally distributed in a country. Because there aren't significant differences between the percentage of families and the percentage of income.

The larger the shaded area-- so the further away this curve gets from the 45 degree line-- the more income inequality there is in a country. And that is what the Gini coefficient is measuring. It's a ratio of this shaded area right here to this triangle formed by this hypothetical, if one person in the country earned all of the income. So as the shaded area then grows in relation to the triangle, the Gini coefficient is larger, and that shows more income disparity.

Like I said, a lot of the graphics that I've been using in this tutorial come from a short video put together to show the distribution of wealth in the United States. If you're interested, you can certainly check it out. It is pretty interesting. But that's totally up to you. I wanted to provide you with that link.

Back to the Gini coefficients. This is a visual image I thought was interesting that I found on global Gini coefficients. I know that you can't see this key here, and I couldn't find a way to make it bigger. I just wanted you to understand that basically countries that are in the blues are countries with lower Gini coefficients. The darkest blue so has the most equal income distribution, or more income equality.

Anything that gets to the red, and then obviously the darkest red, the darkest colors here, are countries with higher Gini coefficients that have more income disparity. What I found was interesting is the fact that the United States is actually red. That shows that we have a lot more income disparity than I think a lot of people realize. If you notice, most of Europe actually has much less income disparity than we do. Kind of interesting

If you would like more information on this or want to know where some of the information came from, you can check out-- the CIA has a nice website that shows a lot of this, and so does the World Bank. So I wanted to provide those links for you.

In this tutorial we talked about what this Gini coefficient measures. And I showed you a little bit about how it's calculated. Hopefully now you understand how the Lorenz curve relates to the Gini coefficient. And we did it apply these concepts to income inequality in our country and in other nations.

Thanks so much for listening, have a great day.