Copyright © by Houghton Mifflin Company. All rights reserved. 1 Measuring the Income Distribution Describing the income distribution. The Lorenz Curve.

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Presentation transcript:

Copyright © by Houghton Mifflin Company. All rights reserved. 1 Measuring the Income Distribution Describing the income distribution. The Lorenz Curve. The Gini coefficient. Empirical evidence on the income distribution.

Copyright © by Houghton Mifflin Company. All rights reserved. 2

3 Figure 5.1: A Graphic Illustration of the Income Distribution

Copyright © by Houghton Mifflin Company. All rights reserved. 4 Gini Coefficient The Gini Coefficient is derived by comparing the Lorenz curve to the line of perfect equality. The Gini coefficient takes on a value between zero and one (inclusive). The more unequal the income distribution, the higher the value of the Gini coefficient. If we denote the area between the Lorenz curve and the line of perfect equality as A, the Gini coefficient is G=2A.

Copyright © by Houghton Mifflin Company. All rights reserved. 5 Gini Coefficient Notice that if the income distribution is perfectly equal and the Lorenz curve follows the line of perfect equality, the area A=0, hence G=0. The Gini coefficient takes on the value of zero when the income distribution is equal. On the other hand, if the income distribution is perfectly unequal, Bill Gates has it all, the Gini coefficient is G=1.

Copyright © by Houghton Mifflin Company. All rights reserved. 6

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