An illustration of income or wealth inequality within a population is the Lorenz Curve. Max O. Lorenz, an economist, made the initial suggestion for the Lorenz Curve in 1905.
A graph called the Lorenz Curve contrasts the actual distribution of wealth or income within a community with an equal distribution. The Lorenz Curve’s vertical axis shows the cumulative percentage of the overall income or wealth that that same percentage of the population owns, while the horizontal axis reflects the cumulative percentage of the population, sorted from poorest to richest.
The Lorenz Curve would be a straight line at an angle of 45 degrees if everyone in a population had an equal share of wealth or income. The Lorenz Curve will be bent outward, suggesting higher inequality, because the distribution of income or wealth is rarely equal in reality.
In economics, the Lorenz Curve is frequently used to assess the level of wealth or income inequality within a population. The distribution of income or wealth throughout the population is more equal the closer the Lorenz Curve is to the diagonal line of perfect equality. The distribution of income or wealth is more uneven the farther the Lorenz Curve is from the diagonal.
The Gini coefficient, a measurement of income or wealth inequality, can be computed using the Lorenz Curve. The Gini coefficient is a number between 0 and 1, where 0 denotes perfect equality (everyone has the same amount of wealth or income), and 1 denotes perfect inequality (all of the wealth or income is owned by one person). The Gini coefficient is determined by dividing the entire area under the diagonal by the distance between the Lorenz Curve and the diagonal of perfect equality.
Importance
- Measuring Inequality: Understanding and quantifying the level of income or wealth disparity within a population is made possible by the Lorenz Curve. This might be a useful tool for scholars and policymakers to comprehend how resources are distributed throughout a society.
- Policy Making: The Lorenz Curve is a tool that policymakers can use to create policies that will lessen income or wealth disparity. Policymakers can pinpoint sections of the population that are most impacted by inequality and create tailored policies to alleviate these gaps by analysing the Lorenz Curve and Gini coefficient.
- Social Justice: The Lorenz Curve has been used as a tool for social justice activism, drawing attention to the unfair allocation of resources and pushing for laws that support more equality.
- Economic Performance: A country’s economic performance can also be assessed using the Lorenz Curve. As inequality can cause social and political instability, nations with high levels of inequality may see slower economic growth.
Limitation
1. It only measures income inequality: The Lorenz Curve only measures income inequality and does not account for other factors, such as access to education, healthcare, and other social services. A more comprehensive measure of inequality would need to consider these factors.
2. It does not account for changes in population size: The Lorenz Curve does not account for changes in population size, which can affect the distribution of income. If the population grows, for example, the distribution of income may appear more equal, even if the actual level of inequality remains the same.
