What Is the Gini Index?
The Gini index, or Gini coefficient, is a measure of the distribution of income across a population developed?by the Italian statistician Corrado Gini?in 1912. It is often used as a gauge of economic inequality, measuring income distribution or, less commonly, wealth distribution among a population. The coefficient ranges from 0 (or 0%) to 1 (or 100%), with 0 representing perfect equality and 1 representing perfect inequality. Values over 1 are theoretically possible due to negative income or wealth.
- 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 total income of the population.
- Global inequality as measured by the Gini index increased over the 19th and 20th centuries, but has declined in more recent years.
- Because of data and other limitations, the Gini index may overstate income inequality and can obscure important information about income distribution.
Understanding the Gini Index
A country in which every resident has the same income would have an income Gini coefficient of 0. A country in which one resident earned all the income, while everyone else earned nothing, would have an income?Gini coefficient of 1.
The same analysis can be applied to wealth distribution (the "wealth Gini coefficient"), but because wealth is more difficult to measure than income,?Gini coefficients usually refer to income and appear?simply as?"Gini coefficient" or "Gini index," without specifying that they refer?to income.?Wealth Gini coefficients tend to be much higher than those for income.
The Gini coefficient is an important tool for analyzing income or wealth?distribution within a country or region, but it should not be mistaken for an absolute measurement of income or wealth. A high-income country and a low-income one can have the same Gini coefficient, as long as incomes are distributed similarly within each: Turkey and the U.S. both had income Gini coefficients around 0.39-0.40 in 2016, according to the OECD, though Turkey's GDP per person was less than half the U.S.'s (in 2010 dollar terms).?
Graphical Representation of the Gini Index
The Gini?index is often represented graphically through the Lorenz curve, which shows income (or wealth) distribution by plotting the population percentile by income on the horizontal axis and cumulative income on the vertical axis. The Gini coefficient is equal to the area below the line of perfect equality (0.5 by definition) minus the area below the Lorenz curve, divided by the area below the line of perfect equality. In other words, it is double the area between the Lorenz curve and the line of perfect equality.
In the graph below, the 47th percentile corresponds to 10.46% in Haiti and 17.42% in Bolivia, meaning that the bottom 47% of Haitians take in 10.46% of their nation's total income and the bottom 47% of Bolivians take in 17.42% of theirs. The straight line represents a hypothetically equal society: the bottom 47% take in 47% of national income.?
To estimate the income?Gini coefficient for Haiti in 2012, we would find the area below its Lorenz curve: around 0.2. Subtracting that figure from 0.5 (the area under the line of equality), we get 0.3, which we then divide by 0.5. This yields an approximate Gini of 0.6 or 60%. The CIA gives the actual Gini for Haiti in 2012 as 60.8% (see below). This figure represents extremely high inequality; only Micronesia, the Central African Republic, South Africa, and Lesotho are more unequal, according to the CIA.
Another way of thinking about the Gini coefficient is as a measure of deviation from perfect equality. The further a Lorenz curve deviates from the perfectly equal straight line (which represents a Gini coefficient of 0), the higher the Gini coefficient and the less equal the society. In the example above, Haiti is more unequal than Bolivia.
The Gini?Index?Around the World
Christoph Lakner of the?World Bank and Branko Milanovic?of the City University of New York estimate that the global income Gini coefficient?was 0.705 in 2008, down from 0.722 in 1988. Figures vary considerably, however. DELTA economists?Fran?ois Bourguignon and Christian Morrisson?estimate that the figure was 0.657 in both 1980 and 1992.?Bourguignon and Morrisson's work?shows a sustained growth in inequality since 1820 when the global Gini?coefficient was 0.500.?Lakner?and Milanovic's shows a decline in inequality around the beginning of the 21st century, as does a 2015 book by Bourguignon:
Source: World Bank.
Economic expansion in Latin America, Asia, and Eastern Europe has driven much of the recent decline in income inequality. While inequality between countries has fallen in recent decades, however, inequality within countries has risen.
Below are the income?Gini?coefficients of every country for which the CIA World Factbook?provides data:
Some of the world's poorest countries (Central African Republic) have some of the world's highest Gini coefficients (61.3), while many of the wealthiest (Denmark) have some of the lowest (28.8). Yet the relationship between income inequality and GDP per capita is not one of perfect negative correlation, and the relationship has varied over time.?Michail Moatsos of?Utrecht University and Joery Baten of?Tuebingen University show that from 1820 to 1929, inequality rose slightly – then tapered off – as GDP per capita increased. From 1950 to 1970, inequality tended to fall off as GDP per capita rose above a certain threshold. From 1980 to 2000 inequality fell with higher GDP per capita then curved back up sharply.
Correlation between?Gini?coefficients and GDP per capita in three time periods. Source:?Moatsos?and Baten.
Though useful for analyzing economic inequality, the Gini coefficient has some shortcomings. The metric's accuracy is dependent on reliable GDP and income data. Shadow economies and informal economic activity are present in every country. Informal economic activity tends to represent a larger portion of true economic production in developing countries and at the lower end of the income distribution within countries. In both cases this means that the Gini index of measured incomes will overstate true income inequality. Accurate wealth data is even more difficult to come by due to the popularity of tax havens.
Another flaw is that very different income distributions can result in identical Gini coefficients. Because the Gini attempts to distill a two dimensional area (the gap between the Lorenz curve and the equality line) down in to a single number, it obscures information about the "shape" of inequality. In everyday terms, this would be similar to describing the contents of a photo solely by it's length along one edge, or the simple average brightness value of the pixels. While using the Lorenz curve as a supplement can provide more information in this respect, it also does not show demographic variations among subgroups within the distribution, such as a the distribution of incomes across age, race, or social groups. In that vein, understanding demographics can be important for understanding what a given Gini coefficient represents. For example, a large?retired population pushes the Gini higher.