1. Gini Coefficient:
The gini index is a measure of statistical dispersion, a measure of the inequality of a distribution, 0 being total equality and a value of 1 maximal inequality. It is most commonly used in economics to assess the inequality of wealth or income, but is also used in other fields such as health, science, ecology, chemistry and engineering. Gini coefficients range from 0.23 (Sweden) to 0.70 (Namibia), but not every country has been assessed. The index is defined through the Lorenz curve, by plotting the proportion of the total income of the population (y-axis) by the bottom x% of the population): The 45 degree line represents the total inequality line. The Gini coefficient is thus calculated using the following formula : G = A/(A+B). A low Gini coefficient represents a more equal distribution, whereas a higher one represents a high income inequality. Developed European nations and Canada tend to have indices between 0.24 and 0.36, whilst the United States and Mexico both have theirs above 0.40, showing there is greater inequality in those two nations. Using the gini index is helpful in quantifying differences in welfare and compensation policies and philosophies. Can be misleading when comparing small and large nations. Advantages of using index as measure of inequality:
* Main advantage is that inequality is measured by means of a ratio analysis, as opposed to per capita income or gross domestic product. * Can be used to compare income distributions across different population sectors as well as countries: urban vs. rural areas. * Better than GDP statistics because they do not represent changes for the whole population, whereas the index demonstrates how income has shifted from the poor to the rich. * Can be used to compare inequality over time
* Four important principles:
* Anonymity: it does not matter who the high and low earners are. * Scale Independence: does not take into consideration the size of the economy, and whether it is a rich or poor country relative to other countries. * Population Independence: Does not matter how large the population of a country is. * Transfer Principle: If income is transferred from a rich person to a poor person the resulting distribution is more equal. Disadvantages of using index as a measure of inequality:
* Does not measure inequality of opportunity, as some countries may have a social class structure that may present barriers to upward mobility, which is not reflected in this index. * Coefficient of different sets of people cannot be averaged to obtain the Gini coefficient of all the people in the sets: if a gini coefficient were to be calculated for each person it would always be zero. For a large country, economically diverse country, a much higher coefficient will be calculated or the country as a whole than will be calculated for each of its regions. * Lorenz curve may understate inequality if high-earners are able to use income more responsibly than low-earners or vice versa. * Measures current income rather than lifetime income. A society in which everyone earned the same over a lifetime would appear unequal because of people at different stages in their life. * The gini coefficient based on net income does not accurately reflect differences in wealth, a possible source of misinterpretation. For example, Sweden has a low income distribution but a very high wealth distribution. Should not measure egalitarianism. * Coefficient is quoted without describing the number of quartiles used for measurement. A coefficient will be smaller if there are five 20% quartiles, as opposed to twenty 5% quartiles, which will yield a higher coefficient. * Coefficient is a point-estimate of equality at a certain time, ignoring life-span changes in income. Increases of young or old members of a society will drive changes in equality.
2. Organization for Economic...