A common measure of income

inequality that can be derived from

column
3 is the ratio of the incomes received
by the top 20% and bottom 40% of
the population. This ratio, sometimes
called a Kuznets ratio after Nobel
laureate
Simon Kuznets, has often been used
as a measure of the degree of
inequality
between high- and low-income groups
in a country. In our example, this
inequality ratio is equal to 51 divided
by 14, or approximately 3.64

"The Kuznets curve, formulated by

Simon Kuznets in the mid-1950s,
argues that in preindustrial societies,
almost everybody is equally poor so
inequality is low. Inequality then rises
as people move from low-productivity
agriculture to the more productive
industrial sector, where average
income is higher and wages are less
uniform. But as a society matures and
becomes richer, the urban-rural gap is
reduced and old-age pensions,
unemployment benefits, and other
social transfers lower inequality. So
the Kuznets curve resembles an
upside-down `U.'"

The Kuznets/inverted-U hypothesis

says that income inequality should
follow an inverse-U shape along the
development process, first rising with
industrialization and then decline, as
more and more workers join the highproductivity sectors of the economy.

Gini coefficient An
aggregate numerical measure
of income inequality ranging
from 0 (perfect equality) to 1
(perfect inequality). It is measured
graphically by dividing
the area between the perfect
equality line and the Lorenz
curve by the total area lying to
the right of the equality line in
a Lorenz diagram. The higher
the value of the coefficient is,
the higher the inequality of
income distribution; the lower
it is, the more equal the distribution
of income.

Income Gini coefficient

Measure of the deviation of the distribution
of income among individuals or households
within a country from a perfectly equal
distribution. A value of 0 represents absolute
equality, a value of 100 absolute inequality.

would be similar, leading to a value of one

Gini-coefficient of inequality: This is the
most commonly used measure of inequality.
The coefficient varies between 0, which
reflects complete equality and 1, which
indicates complete inequality (one person
has all the income or consumption, all others
have none). Graphically, the Gini coefficient
can be easily represented by the area
between the Lorenz curve and the line of
equality.
On the figure to the right, the Lorenz curve
maps the cumulative income share on the
vertical axis against the distribution of the
population on the horizontal axis. In this
example, 40 percent of the population
obtains around 20 percent of total income. If
each individual had the same income, or
total equality, the income distribution curve
would be the straight line in the graph the
line of total equality. The Gini coefficient is
calculated as the area A divided by the sum
of areas A and B. If income is distributed
completely equally, then the Lorenz curve
and the line of total equality are merged and
the Gini coefficient is zero. If one individual
receives all the income, the Lorenz curve
would pass through the points (0,0), (100,0)
and (100,100), and the surfaces A and B

for the Gini-coefficient.

It is sometimes argued that one of the
disadvantages of the Gini coefficient is that
it is not additive across groups, i.e. the total
Gini of a society is not equal to the sum of
the Ginis for its sub-groups.