Gini Index Definition
What is the Gini index?
The Gini index, or Gini coefficient, measures Income distribution within a population. Developed by Italian statistician Corrado Gini in 1912, it is often used as a gauge of Economic inequalitymeasuring the distribution of income or, more rarely, the distribution of wealth within a population.
The coefficient 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 points to remember
- The Gini index is a measure of the distribution of income within a population.
- A higher Gini index indicates greater inequality, with higher income earners receiving much larger percentages of the population’s total income.
- Global inequality, as measured by the Gini index, has steadily increased over the past centuries and peaked during the COVID-19 pandemic.
- Due to data and other limitations, the Gini index may overestimate income inequality and obscure important information about income distribution.
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Understanding the Gini Index
A country in which all residents have the same income would have a Gini coefficient of 0. Conversely, a country in which one resident earned all the income, while all the others earned nothing, would have a Gini coefficient from 1.
The same analysis can be applied to wealth (the “Gini coefficient of wealth”), but because wealth is more difficult to measure than income, Gini coefficients usually refer to income and appear simply as the “Gini coefficient” or “wealth index”. Gini”, without specifying that they refer to income. The Gini coefficients of wealth tend to be much higher than those of income.
Even in rich countries, the Gini index measures net revenue rather than net valueso that the majority of a nation’s wealth may still be concentrated in the hands of a small number of people, even if the income distribution is relatively equal.
The Gini coefficient is an important tool for analyzing the distribution of income or wealth in a country or region, but it should not be confused with an absolute measure of income or wealth. A high-income country and a low-income country can have the same Gini coefficient, as long as income is distributed similarly within each: for example, Turkey and the United States both have Gini coefficients income of about 0.39-0.40, depending on the Organization for Economic Co-operation and Development (OECD)despite Turkey’s considerable decline gross domestic product (GDP) per capita.
Graphic representation of the Gini index
The Gini index is often represented graphically by the Lorenz curve, as shown below, which shows the distribution of income (or wealth) by plotting the percentile of the population by income on the horizontal axis and the cumulative income on the vertical axis. The Gini coefficient is equal to the area under the line of perfect equality (0.5 by definition) minus the area under the Lorenz curve, divided by the area under the line of perfect equality. In other words, it is twice the area between the Lorenz curve and the line of perfect equality.
The Gini index around the world
Global Gini
The Gini coefficient experienced sustained growth during the 19th and 20th centuries. In 1820, the global Gini coefficient was 0.50, while in 1980 and 1992 it was 0.657.
Source: world Bank
COVID-19 is likely to have an additional negative impact on income equality. According to world Bank, the Gini coefficient increased by about 1.5 points in the five years following major epidemics, such as Ebola and Zika. Economists believe COVID-19 triggered a 1.2 to 1.9 percentage point annual increase in the Gini coefficient for 2020 and 2021.
Gini in countries
Below are the Gini coefficients of income for each country for which the CIA World Factbook provides data:
Some of the world’s poorest countries have some of the highest Gini coefficients in the world, while many of the lowest Gini coefficients are found in the wealthiest European countries. However, the relationship between income inequality and GDP per capita is not a perfect negative correlation, and the relationship has varied over time.
Michail Moatsos from the University of Utrecht and Joery Baten from the University of Tuebingen show that from 1820 to 1929 inequality increased slightly and then decreased as GDP per capita increased. From 1950 to 1970, inequalities tended to decrease as GDP per capita exceeded a certain threshold. From 1980 to 2000, inequalities fell with higher GDP per capita and then rose sharply.
Correlation between Gini coefficients and GDP per capita over three periods. Source: Moatsos and Baten.
Limits of the Gini index
Although useful for analyzing economic inequality, the Gini coefficient has some shortcomings.
The accuracy of the measurement depends on reliable data on GDP and income. Underground economies and informal economic activity are present in all countries. Informal economic activity tends to account for a greater share of true economic output in developing countries and at the lower end of the income distribution within countries. In either case, this means that the Gini index of measured income will overestimate true income inequality. Accurate wealth data are even more difficult to obtain due to the popularity of tax havens.
Another flaw is that vastly 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 line of equality) into a single number, it obscures information about the “shape” of the inequality. In common terms, this would be like describing the content of a photo solely by its length along an edge, or simply the average pixel brightness value.
While using the Lorenz Curve as a supplement may provide more information in this regard, it also does not show demographic variations between subgroups within the distribution, such as the distribution of income according to age, race or social groups. In this vein, understanding demographics can be important in understanding what a given Gini coefficient represents. For example, a large population of retirees pushes the Gini higher.
Which country has the highest Gini index?
South Africa, with a Gini coefficient 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 men and urban workers in South Africa earning far better wages 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 half way point and can generally be seen as a place where income is not evenly distributed – only 15 countries in the world have a Gini of 50 or more.
Is the American Gini coefficient high or low?
The United States has a Gini coefficient of 41.1, which is a high figure for such a developed economy. Economists attribute growing income inequality in the United States to factors such as technological change, globalization, the decline of unionsand the erosion value of the minimum wage.
The essential
If the gap between rich and poor continues to increase, the assessment of the income gap may become more important. And the Gini index can provide an excellent starting point for measuring this income inequality. Knowing the Gini indices is not a panacea, but this measure provides a way to quantify and track the direction in which a society is moving, which can open the door to dialogue and potential solutions.
But keep in mind that there are limitations associated with using this metric. The coefficient is only as reliable as the data used to calculate it and it only provides a one-digit reading, which does not take into account the different groups in the sample.