Running head: GINI COEFFICIENTS AND LORENZ CURVES 1

Gini Coefficients and Lorenz Curves in Relation to Income Inequality

Ashley Filapose and Alex Wollenberg
SMA 130 Calculus I
Dr. Jared Burns
Seton Hill University
Running head: GINI COEFFICIENTS AND LORENZ CURVES 2

Gini Coefficients and Lorenz Curves in Relation to Income Inequality

This project displays just one way that Calculus and Statistics can be used to analyze

and evaluate real world data and social issues. To begin, Lorenz Curves are graphical

representations used to show how income is distributed amongst the population in a country.

The shape of the curve indicates the degree of inequality present in that income or wealth

distribution. The Gini Index is a measure of equality, with values ranging from 0 to 1. A value of

zero represents perfect equality, while a value of 1 represents complete inequality. The Gini

Index is calculated using the Gini Coefficient, which is a measurement of the area between a

Lorenz Curve and a line of total equality.

Lorenz Curves and the Gini Index provide a way to assess income inequality within

countries and provide a point of comparison between different economies around the world. It

should be kept in mind however, that there are certain factors that can skew that type of

comparison. Two countries with very different economies and societies can have the same Gini

Index, which is misleading. Income inequality is an issue that society as a whole should be

concerned about because it affects everyone. If the problem is not addressed now and society

does not work to make changes to reduce the effects of income inequality, the problem will only

worsen over time. Presented in this paper are examples of how Calculus can be used to find the

Gini Index, the benefits and drawbacks of using the Gini Index, and finally a summary on

income inequality and how CST can be applied to this issue.

Procedure

Calculations (Questions 1 and 2):

Following are two calculations of the Gini Index given the function L(x), representing two

different Lorenz curves in each example. The equation for finding the Gini Index is as follows:
Running head: GINI COEFFICIENTS AND LORENZ CURVES 3

1
Gini Index = 2 (x L(x))dx . T
he function L(x) is then plugged into the equation, solving for the
0

boundary x=0 to x=1.

1. L(x) = 0.9x2 + 0.1x

1
Gini index = 2 (x (0.9x2 + 0.1x))dx
0

1
2
= 2 ( 9x
10 +
9x
10 )dx
0

1 1
= 9
5 x2 dx + 59 xdx
0 0

= 59 * 31 x3 + 59 * 21 x2 f rom x = 0 to x = 1

x = 0 53 * 03 + 9
10
2
*0 =0

x = 1 53 * 13 + 9
10
2
*1 =
9
10 6
10 = 3
10

L(1) L(0) = 3 0 = 0.3 or 3

10 10

2. L(x) = 0.1x2 + 0.9x

1
Gini index = 2 (x (0.1x2 + 0.9x))dx
0

1
2
= 2 ( x
10 +
x
10 )dx
0

1 1
= 1
5 x2 dx + 51 xdx
0 0

= 51 * 31 x3 + 51 * 21 x2 f rom x = 0 to x = 1

1 3 1 2
x=0 15 *0 + 10 *0 =0

1 3 1 2 3 2 1
x=1 15 *1 + 10 *1 = 30 30 = 30

L(1) L(0) = 1 0 = 0.0333 or 1

30 30
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Gini Indexes(Question 3)

A)The United States had a Gini Index of 0.479 in 2015 according to the Federal Reserve Bank

of St. Louis (FRED Economic Data)

B) Russia had a Gini Index of 0.420 in 2014 according to The World Factbook (Central

Intelligence Agency).

C) China had a Gini Index of 0.469 in 2014 according to The World Factbook (Central

Intelligence Agency).

D) Brazil had a Gini Index of 0.519 in 2012 according to The World Factbook (Central

Intelligence Agency).

Gini Index Trends in the U.S. (Question 4)

The Gini Index has been slowly increasing over the past 25 years, with minor decreases

and increases. The index was stable over the years for the most part, with slightly more

dramatic increasing in more recent years. Since the mid-90s, the index has remained between

0.45 and 0.48 (Americas Health Foundation: United Health Foundation). The Gini Index is a

measure of income distribution, whereas the Gini Coefficient is used to calculate the index and

measures disparity between groups in the economy (rich and poor). This data shows that

income inequality has worsened slightly over recent years, with values greater than 0, which

indicates perfect equality. Between 1980 and 2005, there was approximately a 7 percent

increase in the Gini Coefficient, which was has continued to increase since then. There was a

sudden upward shift in the Gini Coefficient in 1992, which was a result of the Census Bureau

altering the maximum reported amount for household income from $300,000 to $1 million.

Income Inequality and the Gini Index (Question 5)

The Gini Index is reliant upon specific data related to income, such as GDP. In some

developing countries, this data is not readily available or there may be less formal economic
Running head: GINI COEFFICIENTS AND LORENZ CURVES 5

activity that is not accounted for. Without complete data, the Gini Index will not be as accurate

or reliable if it is only based on a portion of all economic activity in a country. Demographics as

well can throw off the calculation of an accurate Gini Index. The Gini Index also only measures

cumulative distribution, so vastly different distributions could result in the same index value,

which would lead to an inaccurate comparison between two countries (Investopedia). The Gini

Index is calculated using the values above and below the Lorenz curve, so two curves could

have the same index, but still be differentiated depending on the shape of the curve (or the

equation of the function of the curve). This ties back to the issue of inaccurately comparing two

countries with the same index. A wealthy country and a poor country can have the same Gini

Index if they have similar income distributions. The Lorenz Curve for those countries would in

fact be different in shape.

Catholic Social Teaching (Question 6)

There are 3 principles of CST that relate to the topic of income inequality: Rights and

Responsibilities, Option for the Poor and Vulnerable, and Constructive Role of Government. The

principle of Rights and Responsibilities states that human dignity should be protected, and that

everyone has a fundamental right to life as well as the necessities of human dignity (food,

shelter, clothing, etc.). Income equality therefore prevents the less privileged members of

society from having access to the basic necessities of life. It is up to society as a whole to help

those in need who are lacking the funds for basic necessities by donating our time or wealth.

This leads into the principle of Option for the Poor and Vulnerable, which states that our

attention as a society should be placed most urgently on helping the poor, marginalized, or

vulnerable.

We should be viewing the economic and social activity through their eyes, giving special

attention to aiding these groups. Income disparity at some level is inevitable, but it should not be
Running head: GINI COEFFICIENTS AND LORENZ CURVES 6

at such an extreme level that some groups do not have equal opportunity or the means to better

their financial and living situations. By doing things like increasing wages for some lower paying

jobs, providing more accessibility to education, or altering tax policies, income inequality can be

lessened. Finally, the principle of Constructive Role of Government states that the government

should assist citizens in fulfilling their societal responsibilities as well as protect human rights.

This goes hand in hand with making changes within society as previously stated to lower the

income disparity. If the government actively identifies income equality as a problem and makes

a conscious effort to alleviate the problem, society will be more apt and better able to assist in

solving this issue.

Summary on Income Inequality (Question 7)

Specifically in the United States, income inequality is at an all time high and is slowly

becoming more and more of a problem. Applying the principles of Catholic Social Teaching as a

society would definitely help decrease this inequality over time. One way of applying these

principles and simultaneously lowering the income inequality, would be to raise the minimum

wage. This does not necessarily mean raising the minimum wage to an extreme amount or as

high as $15 (the amount many workers in minimum wage jobs are demanding). The minimum

wage should however be raised enough to help provide a better quality of living while

simultaneously helping to lessen the wage gap.

One could argue that if the minimum wage is raised then the price of most things in the

market will rise to adjust for it. One could also argue that making minimum wage jobs into living

wage jobs will also be a detriment to society. However, if you apply the CST principles of Rights

and Responsibilities or Option for the Poor and Vulnerable, then the poor would be looked at

first and as a society we should be able to try and aid this cause. Especially since some of the

things people are not able to afford, like education or shelter, are basic human rights which
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again falls under the Rights and Responsibilities principle. Overall, it would seem that a better

balance needs to be achieved in the economy through not just paying people more, but through

giving individuals more opportunity to better their situation.

Conclusion

The Gini Index might not be the perfect way of comparing the income inequality in

different parts of the world and that is okay because it can show us accurately what the income

inequality in specific countries is based on economic data. In the U.S., the Gini index has

increased or the past few years which has become an issue because it is further splitting the

rich from the poor. While there are ideas on ways to lessen that gap, the gap cannot be lowered

by a significant amount any time soon that quickly. Applying CST principles to this issue might

help in the long run but as a society, people are not looking at the poor from their perspective

and the rich only keep getting richer. It is a huge issue that needs to be addressed, but sadly it

might take a little while longer in order for it to be.

References

Americas Health Foundation: United Health Foundation. (2016). Trend: Income Disparity-
Running head: GINI COEFFICIENTS AND LORENZ CURVES 8

United States. Retrieved April 11, 2017, from

http://www.americashealthrankings.org/explore/2015-annual-report/measure/gini/state/A

LL

Central Intelligence Agency. (n.d.). The World Factbook: Country Comparison-Distribution of

Family Income- Gini Index. Retrieved April 11, 2017, from

https://www.cia.gov/library/publications/the-world-factbook/rankorder/2172rank.html

Federal Reserve Bank of St. Louis. (n.d.). Gini Index for the United States. Retrieved

April 11, 2017, from https://fred.stlouisfed.org/

Investopedia. (n.d.) Gini Index. Retrieved April 11, 2017 from

http://www.investopedia.com/terms/g/gini-index.asp

Political Calculations. (December 4, 2013). The Major Trends in U.S. Income Inequality

Since 1947. Retrieved April 11, 2017, from

http://politicalcalculations.blogspot.com/2013/12/the-major-trends-in-us-income.ht

ml#.WOzW7cePWng