what are the advantages of gini coefficient

The Gini coefficient satisfies four principles suggested to be important: [12]

• Anonymity: it does not matter who the high and low earners are.
• Scale independence: the Gini coefficient does not consider the size of the economy, the way it is measured, or whether it is a rich or poor country on average.
• Population independence: it does not matter how large the population of the country is.

Full Answer

What is the Gini coefficient?

The Gini coefficient (Gini index or Gini ratio) is a statistical measure of economic inequality in a population. The coefficient measures the dispersion of income

What is the Gini index of the global economy?

Taking world economy as one, and income distribution for all human beings, for example, different scholars estimate global Gini index to range between 0.61 and 0.68. Same population with same income distribution, analyzed differently, yields different Gini coefficients

Does Gini index have a downward-bias?

Gini index has a downward-bias for small populations. Counties or states or countries with small populations and less diverse economies will tend to report small Gini coefficients. For economically diverse large population groups, a much higher coefficient is expected than for each of its regions.

What does Gini stand for?

Jump to navigation Jump to search. In economics, the Gini coefficient (/ˈdʒiːni/ JEE-nee), sometimes called Gini index, or Gini ratio, is a measure of statistical dispersion intended to represent the income or wealth distribution of a nation's residents, and is the most commonly used measurement of inequality.

Does the Gini coefficient have any disadvantages?

One of the drawbacks of the coefficient is that it does not take into consideration the structural changes in a population. Such changes can significantly influence the economic inequality in a population. Generally, the situation arises because young people tend to earn less relative to older people.

What is the Gini coefficient and why is it important?

The Gini coefficient measures how far the actual Lorenz curve for a society's income or wealth is from the line of equality. Both the Lorenz curve and the line of equality are plotted on a graph. Then the area between the two graphs is computed.

What is the weakness of the Gini coefficient?

The Gini coefficient's main weakness as a measure of income distribution is that it is incapable of differentiating different kinds of inequalities. Lorenz curves may intersect, reflecting differing patterns of income distribution, but nevertheless resulting in very similar Gini coefficient values.

What are the advantages of inequality?

Advantages of Inequality If someone works harder and as a consequence receives a higher wage then this is not market failure. The promise of a higher wage is essential to encourage extra effort. By rewarding hard work, there will be a boost to productivity leading to a higher national output – so everyone can benefit.

Is a high Gini coefficient good?

The Gini index is a measure of the distribution of income across a population. A higher Gini index indicates greater inequality, with high-income individuals receiving much larger percentages of the population's total income.

Who has the best Gini coefficient?

South AfricaGINI index (World Bank estimate) - Country RankingRankCountryValue1South Africa63.002Namibia59.103Suriname57.904Zambia57.10117 more rows

What affects the Gini coefficient?

Our analysis showed that the median age of the population appears to have a significant influence on the differences in Gini coefficients, which varies inversely with the median age of the population.

Which country has the lowest Gini coefficient?

South AfricaCountries with the highest and lowest Gini coefficients. South Africa ranks as the country with the lowest level of income equality in the world, thanks to a Gini coefficient of 63.0 when last measured in 2014.

Is a low Gini coefficient good?

The Gini coefficient is the most well-known measure of income inequality. A Gini coefficient of zero means there is an equal distribution of income, whereas a number closer to one indicates greater inequality. The lower the Gini coefficient, the more equal the society is said to be.

How is inequality helpful in economic growth?

High levels of inequality reduce growth in relatively poor countries but encourage growth in richer countries. High levels of inequality reduce growth in relatively poor countries but encourage growth in richer countries, according to a recent paper by NBER Research Associate Robert Barro.

Is inequality good or bad for the economy?

Greater income inequality can lead to monopolization of the labor force, resulting in fewer employers requiring fewer workers. Remaining employers can consolidate and take advantage of the relative lack of competition, leading to less consumer choice, market abuses, and relatively higher real prices.

Why inequality is natural and is good?

Inequality is natural and is good They deserve higher rewards because they have special talents or are prepared to take risks. This is natural. The best people are motivated by being rewarded more. Therefore inequality makes society work better.

What is the Gini coefficient in simple terms?

The Gini coefficient is a statistic which quantifies the amount of inequality that exists in a population. The Gini coefficient is a number between 0 and 1, with 0 representing perfect equality and 1 perfect inequality.

What does the Gini coefficient tell you about a country?

The Gini coefficient is a single number that demonstrates a degree of inequality in the distribution of income/wealth. It is used to estimate how far a country's wealth or income distribution deviates from a equal distribution.

What does a Gini coefficient of 0.7 mean?

Gini index < 0.2 represents perfect income equality, 0.2–0.3 relative equality, 0.3–0.4 adequate equality, 0.4–0.5 big income gap, and above 0.5 represents severe income gap.

What does a Gini coefficient of 0.6 mean?

Definition. The Gini coefficient is usually a number between 0 and 1 (or 0 to 100). 0 means a country where the income is equally distributed. On the other hand, 1 means that one person owns everything but the rest owns nothing. In reality, all scores are between 0.25 and 0.6 (between 25 and 60 on the 0 to 100 scale).

What is the Gini coefficient in the real world?

The values ​​0 and 1 are extreme, so they are impossible in the real world. The data show that the coefficients generally range from 0.24 to 0.63. In most EU countries, the Gini coefficient ranges from 0.22-0.37. In the United States, inequality was higher, with the Gini coefficient at 0.39 in 2017.

What is Gini coefficient?

What’s it: Gini coefficient is a statistic of economic inequality in a society. It tells you the distribution of income or wealth among individuals in an economy. It is not an absolute measure of a country’s income or wealth. It just tells you how the income or wealth in the economy is spread out among the population.

What does the coefficient represent?

Represents change for the entire population. The coefficient represents the change for the entire population. When it increases over time, income inequality is getting more acute, even though at the same time, the GDP per capita figure continues to rise.

What is the Gini ratio?

The Gini ratio is the most widely used measure of economic inequality, including in Indonesia. But it also has some pros and cons. Among the advantages of the Gini coefficient are: Easy to interpret. The coefficient is quite simple and is a single number. Therefore, you can easily draw conclusions.

What is the X axis of the Lorenz curve?

The X-axis of the curve represents the cumulative percentage of the population by income, from lowest to highest. Meanwhile, the Y-axis represents the cumulative percentage of income earned. The result will be more or less as below.

What does 0 mean in Gini?

The Gini coefficient = 0 indicates a perfect distribution of income or wealth. This means that each individual has precisely equal income or wealth.

Why are the numbers inaccurate in different sampling techniques?

Depends on the validity of the sample. Different sampling techniques yield different numbers. Also, the sampling may be less representative hence results in inaccurate numbers.

What is the Gini coefficient of the richest 20%?

The proverbial case where the richest 20% have 80% of all income (see Pareto principle) would lead to an income Gini coefficient of at least 60% .

How is Shorrocks index calculated?

Shorrocks index is calculated in number of different ways, a common approach being from the ratio of income Gini coefficients between short-term and long-term for the same region or country.

What is the Gini coefficient of a high income group?

If the high income group is a proportion u of the population and earns a proportion f of all income, then the Gini coefficient is f − u . An actual more graded distribution with these same values u and f will always have a higher Gini coefficient than f − u .

Why is Gini coefficient important?

The Gini coefficient is a relative measure. It is possible for the Gini coefficient of a developing country to rise (due to increasing inequality of income) while the number of people in absolute poverty decreases. This is because the Gini coefficient measures relative, not absolute, wealth. Changing income inequality, measured by Gini coefficients, can be due to structural changes in a society such as growing population (baby booms, aging populations, increased divorce rates, extended family households splitting into nuclear families, emigration, immigration) and income mobility. Gini coefficients are simple, and this simplicity can lead to oversights and can confuse the comparison of different populations; for example, while both Bangladesh (per capita income of $1,693) and the Netherlands (per capita income of $42,183) had an income Gini coefficient of 0.31 in 2010, the quality of life, economic opportunity and absolute income in these countries are very different, i.e. countries may have identical Gini coefficients, but differ greatly in wealth. Basic necessities may be available to all in a developed economy, while in an undeveloped economy with the same Gini coefficient, basic necessities may be unavailable to most or unequally available, due to lower absolute wealth.

What countries have the highest Gini coefficient?

For OECD countries over the 2008–2009 period, the Gini coefficient (pre-taxes and transfers) for a total population ranged between 0.34 and 0.53, with South Korea the lowest and Italy the highest. The Gini coefficient (after-taxes and transfers) for a total population ranged between 0.25 and 0.48, with Denmark the lowest and Mexico the highest. For the United States, the country with the largest population of the OECD countries, the pre-tax Gini index was 0.49, and the after-tax Gini index was 0.38, in 2008–2009. The OECD averages for total populations in OECD countries was 0.46 for the pre-tax income Gini index and 0.31 for the after-tax income Gini index. Taxes and social spending that were in place in 2008–2009 period in OECD countries significantly lowered effective income inequality, and in general, "European countries—especially Nordic and Continental welfare states —achieve lower levels of income inequality than other countries."

How to approximate Gini coefficient?

In that case, the Gini coefficient can be approximated by using various techniques for interpolating the missing values of the Lorenz curve. If ( Xk, Yk) are the known points on the Lorenz curve, with the Xk indexed in increasing order ( Xk – 1 < Xk ), so that:

What is Gini coefficient?

In economics, the Gini coefficient ( / ˈdʒiːni / JEE-nee ), sometimes called the Gini index or Gini ratio, is a measure of statistical dispersion intended to represent the income inequality or wealth inequality within a nation or any other group of people. It was developed by the Italian statistician and sociologist Corrado Gini .

Definition

The graph shows that the Gini is equal to the area marked 'A' divided by the sum of the areas marked 'A' and 'B' (that is, Gini = A/ (A+B)). It is also equal to 2*A, as A+B = 0.5 (since the axes scale from 0 to 1).

Calculation

The Gini index is defined as a ratio of the areas on the Lorenz curve diagram. If the area between the line of perfect equality and the Lorenz curve is A, and the area under the Lorenz curve is B, then the Gini index is A/ (A+B). Since A+B = 0.5, the Gini index, G = A/ (0.5) = 2A = 1-2B.

Generalised inequality index

The Gini coefficient and other standard inequality indices reduce to a common form. Perfect equality—the absence of inequality—exists when and only when the inequality ratio, , equals 1 for all j units in some population; for example, there is perfect income equality when everyone’s income equals the mean income , so that for everyone).

Gini coefficient of income distributions

While developed European nations and Canada tend to have Gini indices between 0.24 and 0.36, the United States' and Mexico's Gini indices are both above 0.40, indicating that the United States (according to the US Census Bureau) and Mexico have greater inequality.

Advantages and disadvantages

The Gini coefficient's main advantage is that it is a measure of inequality by means of a ratio analysis. This makes it easily interpretable, and avoids references to a statistical average or position unrepresentative of most of the population, such as per capita income or gross domestic product.

Other uses

Although the Gini coefficient is most popular in economics, it can in theory be applied in any field of science that studies a distribution. For example, in ecology the Gini coefficient has been used as a measure of biodiversity, where the cumulative proportion of species is plotted against cumulative proportion of individuals.

What is Gini index?

The Gini Index is the most popular measure of income inequality ( De Maio, 2007; Pryce et al, 2011) and is the measure that the International Labour Organisation (ILO) used in its most recent study on income inequality ( 2008 ). The Gini Index is derived from the Lorenz curve of cumulative income distribution ( Gini, 1921 ). A Gini coefficient of zero indicates perfect equality – everyone has the same income, whereas a Gini coefficient of one is perfect inequality – one person has all the income. Thus, the Gini Index measures the extent to which income distribution deviates from a perfectly equal distribution or in other words, it measures ‘the ratio of the area between the Lorenz Curve and the equidistribution line (henceforth, the concentration area) to the area of maximum concentration’ ( Bellú and Liberati, 2006, p. 4). Some scholars have pointed to limitations of using the Gini Index, namely that it is incapable of differentiating income inequalities. As a result, it is more sensitive to income inequalities in the middle part of the distribution ( De Maio, 2007 ).

What was the GFC in 2008?

The Financial Crisis Inquiry Report (FCIR) in the United States has placed executive compensation – size and structure – at the heart of the 2008 GFC. It highlights that there is a relation between uncontrolled growth of executive compensation and economic collapses like the Great Depression in 1929 and the current crisis ( FCIR, 2011 ).

Why use CGI?

This allows for better assessing the impact of corporate remuneration policies and practices in the wider society. As discussed above, disclosing the CGI will allow institutions to monitor whether certain inequality-led macroeconomic ( Hsing, 2005; Kumhof and Rancière, 2010; Berg and Ostry, 2011; Azzimonti et al, 2012) and macro-social trends ( Willkinson and Pickett, 2009a, 2009b) are occurring at the microeconomic level whereby, increased inequality may damage long-term shareholder value, and other stakeholders such as employees’ morale, turnover, wages and ultimately, the whole of the society.

Is CGI a measure of corporate income inequality?

Although it is clear that a CGI is far more valuable as a measure of corporate income inequality, discussion has almost obsessively concentrated in disclosing the multiples of CEO pay to median employee earnings. The US SEC has recently mandated the disclosure of the ratios ( SEC, 2013) providing much discretion for companies to choose the methodology to calculate it. We argue that, if the SEC is serious in monitoring executive pay and corporate income inequality, then it must ensure that this is done properly by using the best metrics available – The CGI.

Does the case study allow for controlling board oversight and ownership structure?

The case study did not allow for controlling board oversight and ownership structure. However, we did observe that after the company changed from a monistic (in operation until 2006) to an Anglo-American Model of Governance (2007), inequality shown as the rise in the CGI, rocketed from 0.1645 to 0.3150, thus supporting literature claims that this type of governance model produces more inequality ( Clarke, 2010 ). Noting this observation, it is plausible that we could better explain the CGI growth for the period by the company growth and consequent increase in executive compensation, among other aspects. We recognise that it may take some time for the corporate governance model changes to take effect. Nevertheless, we do not rule out that these changes had some effect during the period under analyses, and we certainly hypothesise future growth in the company CGI as the model becomes more dominant and embedded in executive culture.

Is CGI a simple process?

Computing the CGI is actually a very simple process. The problem is getting the data right. We devised a more comprehensive measure of inequality that accounts for the wider workforce and society. We computed a Standard Gini Index using the covariance formula as Bellú and Liberati (2006) suggested:

How is relative income inequality measured?

Income levels of countries themselves also vary substantially. Income inequality is often measured at the national level using the Gini coefficient and at the global level comparing differences in per capita gross domestic product.

How is the Lorenz curve calculated?

The Lorenz curve is calculated on a graph where "cumulative family income is plotted against the number of families arranged from the poorest to the richest," according to the Central Intelligence Agency.

What are the disadvantages of income inequality?

Other politicians, philosophers and economists believe that income inequality is detrimental to economic growth, social justice and human well-being. For example, the World Bank reports that "high inequality threatens a country’s political stability," as those without high incomes are dissatisfied ...

What is income inequality?

Income inequality is essentially a difference between the amount of monetarily described earnings of one person or group of people, and others. Often, the debate is framed in terms of "haves" and "have-nots," or the wealthy as compared to the impoverished.

Why is it important to understand the advantages and disadvantages of income inequality?

Understanding this debate is important because it provides insight into the rationale behind policy decisions and helps inform the conversation of macroeconomic theory. In addition, the causes and effects ...

Does inequality lead to corruption?

According to Anna Bernasek of the "New York Times," "some scientists believe that growing inequality leads to more health problems in the overall population," and "income inequality can breed corruption," which is thought to limit long-term growth by inefficiently allocating economic resources.

Is income inequality a natural or a natural feature?

Some scientists and politicians consider income inequality to be a natural and beneficial feature of a nation's economy. According to the American Enterprise Institute, a political think-tank, the "growing inequality gap is associated with growing oppor­tunity—in this case, the opportunity to advance through education.".

What is informal economy?

Informal economy accounts for over half of global employment and as much as 90 per cent of employment in some of the poorer sub-Saharan countries with high official Gini inequality coefficients. Schneider et al., in their 2010 study of 162 countries, report about 31.2%, or about $20 trillion, of world's GDP is informal. In developing countries, the informal economy predominates for all income brackets except for the richer, urban upper income bracket populations. Even in developed economies, between 8% (United States) to 27% (Italy) of each nation's GDP is informal, and resulting informal income predominates as a livelihood activity for those in the lowest income brackets. The value and distribution of the incomes from informal or underground economy is difficult to quantify, making true income Gini coefficients estimates difficult. Different assumptions and quantifications of these incomes will yield different Gini coefficients.

What is the Pareto improvement principle?

The Pareto improvement principle, named after the Italian economist Vilfredo Pareto, states that a social, economic or income change is good if it makes one or more people better off without making anyone else worse off. Gini coefficient can rise if some or all income brackets experience a rising income. Feldstein’s explanation is summarized in Table D. The table shows that in a growing economy, consistent with Pareto improvement principle, where income of every segment of the population has increased, from one year to next, the income inequality Gini coefficient can rise too. In contrast, in another economy, if everyone gets poorer and is worse off, income inequality is less and Gini coefficient lower.

Why is the Gini index so high in Hong Kong?

Kwok claims income Gini index for Hong Kong has been high (0.434 in 2010), in part because of structural changes in its population. Over recent decades, Hong Kong has witnessed increasing numbers of small households, elderly households and elderly living alone. The combined income is now split into more households. Many old people are living separately from their children in Hong Kong. These social changes have caused substantial changes in household income distribution. Income Gini coefficient, claims Kwok, does not discern these structural changes in its society. Household money income distribution for the United States, summarized in Table C of this section, confirms that this issue is not limited to just Hong Kong. According to the US Census Bureau, between 1979 and 2010, the population of United States experienced structural changes in overall households, the income for all income brackets increased in inflation-adjusted terms, household income distributions shifted into higher income brackets over time, while the income Gini coefficient increased.

Why is the Gini coefficient limited?

Gini coefficient is inherently limited because of its relative nature. Its proper use and interpretation of income Gini coefficient is controversial. As example, Mellor explains, income Gini index of developing countries can rise, that is the income distribution get more unequal at the same time that the number of people in absolute poverty are ...

What are the limitations of Gini coefficient?

Arnold describes one limitation of Gini coefficient to be income distribution situations where it misleads. The income of poorest fifth of households can be lower when Gini coefficient is lower, than when the poorest income bracket is earning a larger percentage of all income. Table D illustrates this case, where the lowest income bracket has an average household market income of $500 per year at Gini index of 0.51, and zero income at Gini index of 0.48. This is counter-intuitive and Gini coefficient cannot tell what is happening to each income bracket or the absolute income, cautions Arnold.

What is Gini coefficient?

The Gini coefficient measure gives different results when applied to individuals instead of households, for the same economy and same income distributions. If household data is used, the measured value of income Gini depends on how the household is defined.

What is the Gini index?

Gini index loses information about absolute national and personal incomes. Populations can have very low income inequality Gini indices yet simultaneously very high wealth Gini index. By measuring inequality in income, the Gini ignores the differential efficiency of use of household income.

Overview

History

Definition

Calculation

Generalized inequality indices

Of income distributions

Of social development

Features