LORENZ CURVE AND GINI CONCENTRATION RATIO

The Lorenz curve was developed by Max O. Lorenz in 1905 was basically to measure the distribution of
inequality in income or wealth. It can also use to measure the degree of concentration of population by
localities .In other words, it is a graphical representation of the distribution of income or wealth .
- Income Distribution also intimately tied with the process of economic growth.
- Reducing inequality is frequently an important goal of governments.
The Lorenz curve is represented by a straight diagonal line, which represents perfect equality in
income or wealth distribution; the Lorenz curve lies beneath it, showing estimated distribution. The area
that is between the straight line and the curved line is the Gini coefficient. The Gini Coefficient itself is
expressed as a representation of the scalar measurement of inequality. In the Lorenz Curve, the Gini
Coefficient is expressed as the ratio of the area under the straight line
𝐴
𝐺𝑖𝑛𝑖 − 𝐶𝑜𝑒𝑓𝑓𝑖𝑐𝑖𝑒𝑛𝑡 =
𝐴+𝐵
The Lorenz curve is used to represent economic inequality as well as unequal wealth distribution.
The farther away the curved line is way from the straight diagonal line, the higher the level of inequality.
Constructing a Lorenz curve involves fitting a continuous function to some incomplete set of data, there
is no guarantee that the values along a Lorenz curve (other than those actually observed in the data)
actually correspond to the true distributions of income.
Most of the points along the curve are just guesses based on the shape of the curve that best fits
the observed data points. So the shape of the Lorenz curve can be sensitive to the quality and sample size
of the data and to the mathematical assumptions and judgments as to what constitutes the best fit curve,
and these may represent sources of substantial error between the Lorenz curve and the actual
distribution.

The curve (B) is a graph showing the proportion of overall income or wealth assumed by the
bottom x% of the people, although this is not rigorously true for a finite population. It is often used to
represent income distribution, where it shows for the bottom x% of households, what percentage,
represented by a straight line – A, (y%) of the total income they have. The percentage of households is
plotted on the x-axis, the percentage of income on the y-axis. It can also be used to show the distribution
of assets. In such use, many economists consider it to be a measure of social inequality.
The Gini coefficient is the ratio of the area between the line of perfect equality and the observed
Lorenz curve to the area between the line of perfect equality and the line of perfect inequality.
Using the Gini Coefficient to Measure Income Inequality
Gini coefficient: a measure of income inequality based on the Lorenz curve.
• The Lorenz curve has a bowed shape because of income inequality.
• If income were perfectly equally distributed, then the poorest 20% of people would receive 20% of total
income, and so on.
• In this case, the Lorenz curve would be a straight line with a slope of one; • This is the “line of perfect
equality” in above Figure
• The more bowed-in is the Lorenz curve, the more unequally income is distributed.
• Use this property of the Lorenz curve to construct an index that summarizes inequality in a single
number.
• The Gini coefficient measures the area between the Lorenz curve and the line of perfect equality and
dividing this area by the total area under the line of perfect equality.
•The more bowed-in is the Lorenz curve, and thus the more unequal is the distribution of income, the
higher will be the value of the Gini coefficient.
•If income is perfectly equally distributed, then the value of the Gini coefficient will be zero.
•If income is as unequally distributed as possible – that is, if a single person receives all Income in the
country – then the Gini coefficient will be one.
The Gini Index can be calculated by
Gini-Concentration ratio =∑𝑖=1 𝑋𝑖 𝑌𝑖+1 − 𝑋𝑖+1 𝑌𝑖
=𝐺1 − 𝐺2
Then Ducan introduce Index concentration ,which calculated simple by percentage distribution of the
units.1
1
The index concentration =IC= ∑𝑛𝑖=1(𝑥𝑖 − 𝑦𝑖 )
𝑛
Where 𝑥𝑖 and 𝑦𝑖 be the present distribution of the two vitiate.
What is the Lorenz curve used for?
A Lorenz curve is a graphical representation of income inequality or wealth inequality. The graph plots
percentiles of the population on the horizontal axis according to income or wealth.
How is the Lorenz curve interpreted?
In a given area A for example, the closer the Lorenz curve is to the line of equality, the smaller area A is,
and the Gini coefficient will be low. If there is a high degree of inequality, then area A will be a bigger
percentage of the total area.
How do you plot a Lorenz curve?
To graph a Lorenz curve, the response variable (usually income or wealth) is first indexed in either equal
or increasing order. Then points are graphed for a continuous distribution.

Computation of Gini Concentration Ratio for Persons Living in Urban

Localities
in India 1981
Cumulative
Proportion Proportion
Class Number Locality Locality
Total Town Population Population Population XiY(i+1) X(i+1)Yi
I 216 94292988 0.067 0.604 0.067 0.604 0 0
II 270 18191847 0.083 0.116 0.15 0.72 0.09 0.048
III 739 22413463 0.228 0.144 0.377 0.864 0.272 0.129
IV 1048 14862211 0.323 0.095 0.7 0.959 0.605 0.362
V 742 5641505 0.229 0.036 0.929 0.995 0.891 0.697
VI 230 786483 0.071 0.005 1 1 0.995 0.929

Total 3245 156188497 2.853 2.165

The Gini Concentration ratio=2.853-2.165=0.688