What Is the Gini Index?
The Gini index, or Gini co-efficient, measures income distribution across a population. Developedby Italian statistician Corrado Giniin 1912, it often serves as a gauge of economic inequality, measuring income distribution or, less commonly, wealth distribution among a population.
The co-efficient ranges from 0 (or 0%) to 1 (or 100%), with 0 representing perfect equality and 1 representing perfect inequality. Values greater than 1 are theoretically possible due to negative income or wealth.
Key Takeaways
- 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.
- Global inequality, as measured by the Gini index, has steadily increased over the past few centuries and spiked during the COVID-19 pandemic.
- Because of data and other limitations, the Gini index may overstate income inequality and can obscure important information about income distribution.
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Understanding the Gini Index
A country in which every resident has the same income would have an income Gini co-efficient of 0. Conversely, a country in which one resident earned all the income, while everyone else earned nothing, would have an incomeGini co-efficient of 1.
The same analysis can apply to wealth distribution (the wealth Gini co-efficient), but because wealth is more difficult to measure than income,Gini co-efficients usually refer to income and appearsimply asthe Gini co-efficient or Gini index, without specifying that they referto income.Wealth Gini co-efficients tend to be much higher than those for income.
Even in affluent countries, the Gini index measures net income rather than net worth, so the majority of a nation’s wealth can still be concentrated in the hands of a small number of people even if income distribution is relatively equal.
The Gini co-efficient is an important tool for analyzing income or wealthdistribution 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 country can have the same Gini co-efficient, as long as incomes are distributed similarly within each. For example, Turkey and the United States both have income Gini co-efficients of around 0.39–0.40, according to the Organisation for Economic Co-operation and Development (OECD), despite Turkey’s vastly lower gross domestic product (GDP) per person.
Graphical Representation of the Gini Index
The Giniindex is often represented graphically through the Lorenz curve, as depicted below, 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 co-efficient 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.
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The GiniIndexAround the World
Global Gini
The Gini co-efficient experienced sustained growth during the 19th and 20th centuries. In 1820, the global Gini co-efficient stood at 0.50, while in 1980 and 1992, the figure was 0.657.
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Source: The World Bank
COVID-19 is likely to have a further negative impact on income equality. According to The World Bank, the Gini co-efficient has increased about 1.5 points in the five years following major epidemics, such as Ebola and Zika. Economists believe COVID-19 triggered an annual 1.2- to 1.9-percentage-point increase in the Gini co-efficient for 2020 and 2021.
Giniwithin Countries
Below are the incomeGinico-efficients of every country for which the U.S. Central Intelligence Agency (CIA) World Factbookprovides data:
Some of the world’s poorest countries have some of the world’s highest Gini coefficients, while many of the lowestGini coefficients are found in wealthier European countries. However, 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 ofUtrecht University and Joery Baten ofTuebingen 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 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.
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Limitations of the Gini Index
Though useful for analyzing economic inequality, the Gini co-efficient 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 co-efficients. Because the Gini attempts to distill a two-dimensional area (the gap between the Lorenz curve and the equality line) down 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 its length along one edge, or the simple average brightness value of the pixels.
Though 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 the distribution of incomes across age, race, or social groups. In that vein, understanding demographics can be important for understanding what a given Gini co-efficient represents. For example, a largeretired population pushes the Gini higher.
What country has the highest Gini index?
South Africa, with a Gini co-efficient of 63.0, is currently recognized as the country with the highest income inequality. The World Population Review attributes this massive inequality to racial, gender, and geographic discrimination, with white males and urban workers in South Africa earning much better salaries than everyone else.
What does a Gini index of 50 mean?
The Gini index ranges from 0% to 100%, with 0 representing perfect equality and 100 representing perfect inequality. A Gini of 50 marks the halfway point and can generally be perceived as a place where income is not fairly distributed. Only 15 countries in the world have a Gini of 50 or more.
Is the U.S. Gini co-efficient high or low?
The United States has a Gini co-efficient of 41.1, which is a high reading for such a developed economy. Economists blame rising income inequality in the U.S. on factors such as technological change, globalization, the decline of unions, and the eroding value of the minimum wage.
The Bottom Line
If the gap between rich and poor continues to increase, the evaluation of the income gap can become more important. And the Gini index can provide a great starting point when it comes to measuring that income inequality. Knowing the Gini index numbers is no panacea, but this measure does provide a way to quantify and track the direction in which a society is moving, which may open the door for dialogue and potential solutions.
But keep in mind that there are limitations associated with using this measure. The co-efficient is only as reliable as the data used to calculate it, and it only provides a single-digit reading, which doesn’t take different groups in the sample into account.
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