GINI Coefficient, The Lorenz Curve

 

GINI Coefficient:

• It is the statistical measure used to determine the income distribution among the country’s population.

• It expresses economic inequality amongst the population.

• The GINI coefficient ranges from 0 to 1

• GINI coefficient 0 represents perfect equality and 1 represents perfect inequality.

• Higher index indicates greater inequality, with high income individuals receiving much larger percentages of the total income of the population.

      

Understanding The Lorenz Curve:

• The Gini index is calculated as the ratio of the area between the perfect equality line and the Lorenz curve (A) divided by the total area under the perfect equality line (A + B).
• Lorenz Curve plots cumulative % of population against cumulative % of income.

Interpretation of the curve:

If A=0;

G=0/0+B

   =0 ie perfect equality 

If B=0 ;

G=A/A+0

   =1 ie perfect inequality

Further extrapolation of Lorenz Curve:

For understanding:

• If G.C <.5------------lower inequality 

Ex. East Asian Countries, Scandinavian Countries

• If G.C. >.5 -----------Higher Inequality

Ex. Latin American countries, Mexico,USA.

World inequality Report 2022:

• The top 1% of the population hold more than one-fifth of the total national income in 2021 and the bottom half just 13%.
• LPG Reforms adopted by India in 1991 have benefitted mostly the Top 1 % of the population.

Link between Economic Growth and income inequality :

Period 1951-81----------------

Period of Lower GDP growth rate

&

Lower income inequality

 Post 1981---------------------

Higher GDP Growth

&

 Higher Income Inequality

&

Lower Poverty                                               

 

MIDDLE INCOME TRAP

 

MIDDLE INCOME TRAP:

In 2006, economists Indermit Gill and Homi Kharas at the World Bank coined the term “middle-income trap”. 

Meaning of Middle Income Trap:

• Low-income countries with cheap labour and easy access to ready-made imported technology grow fast and start becoming wealthier. 

                                                                         But 

• As these Low income countries attain status of a middle-income country, they tend to slow down as they lose some of their advantages.
• This slowing down of  Low income country Economy is referred to as Middle Income Trap.

Why Middle Income Trap :

• As the country moves from Low income to middle income, the labour become costlier 
• These countries  loose support from foreign countries as they are coming out of the tag of low income group country. 

Middle Income Trap is characterised by low productivity and entrenched inequality. 

Ex. Mexico and Brazil are classic examples of such countries.  South Korea, has escaped the trap. while China is at the cusp.