The Gini coefficient measures income the inequality of a population of a country or region. The values of Gini coefficient values are between zero and one with the lowest coefficient (zero) representing equality in which all earn equal income while a coefficient of one indicates an inequality whereby only one person earns all the income among a group of workers. However, a Gini coefficient value of greater than one may be obtained in a case of a negative contribution to the total wealth or income.
Features Of A Gini Coefficient
Gini coefficient is effective in the measurement of dispersion in inequality because of its important features. It is easier to interpret since it is a ratio analysis method. Gini coefficient avoids reference to calculated averages of most of the population such as the gross domestic product and can be used to rank different regions or groups. It can also be used to compare income distribution within a period, making it easy to determine whether the inequalities are increasing or increasing. Other characteristics of the Gini coefficient include anonymity since it does not select the type of the income earner, it can also be used to measure disparity over a large population without necessarily considering the size of the economy.
Calculation Of Gini Coefficient
An equal society is one that uniformly receives same income (G=0) while an unequal society is one where an individual receives 100% of the income (G=1-1/N). Income distribution of a region or a country does not follow the simple function rule. The function gives a measurable analysis of the income distribution of a region. A clear case of income distribution distinguishes levels of income as high income or low income. The Gini coefficient can, therefore, be calculated using discrete probability distribution, continuous probability distribution, or Chi-square distribution among other methods. The Gini coefficient can be represented mathematically on a Lorenz Curve which plots the proportion of population’s income earned cumulatively by a bottom percentage of the population. The Gini coefficient of income is obtained for both the market income and disposable income basis while the coefficient of market income is obtained from pre-taxed income and transfer. The Gini coefficient of the whole world ranges from 0.60 to 0.68.
Application Of Gini Coefficient
The Gini coefficient is used in a wide range of fields including psychology, economics, and agriculture. In education, Gini coefficient is used to estimate the level of inequality in education for the given population. Opportunity Gini coefficient is used to measure the inequality of opportunity. Gini coefficient can also be used to measure income mobility by estimating whether the Gini coefficient of income inequality is permanent or or subject to changes and also the extent to which a region allows for economic changes to the citizens sin order for them to move from one level of income to another over a given period.
Limitations Of Gini Coefficient
The use and interpretation of Gini coefficient are controversial since it is a relative measure. The changing income inequalities as measured by Gini coefficient can be as a result of the structural changes in a society such as the shift in the composition of the population. The simplicity of the Gini coefficient may lead to oversight and confusion in the comparison of the different populations.