🟠 Topic 20: Inequality – Lorenz Curve & Gini Coefficient

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📌 Introduction

Economic inequality refers to the unequal distribution of income, wealth, and opportunities within a society. While some level of inequality is natural in all economies, excessive inequality can hinder economic growth, weaken social cohesion, and undermine democracy. Tools like the Lorenz Curve and the Gini Coefficient are widely used to measure and visualize inequality.

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🔹 What is Economic Inequality? ⚖️

📖 Definition

Economic inequality refers to the uneven distribution of income, wealth, and resources among individuals or households within a country.

Types of Inequality

Type	Description
Income Inequality	Uneven distribution of income from work, rent, interest, profit.
Wealth Inequality	Unequal ownership of assets (land, houses, shares, savings).
Social Inequality	Inequalities in health, education, and access to services.
Regional Inequality	Economic disparities between different regions within a country.

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⚠️ Key Causes of Inequality

1️⃣ Unequal Access to Education & Skills – Poor quality education limits opportunities.
2️⃣ Jobless Growth – Economic growth that doesn’t create enough jobs.
3️⃣ Wealth Concentration – Assets concentrated in the hands of a few individuals/families.
4️⃣ Social Discrimination – Caste, gender, and religious biases restrict opportunities.
5️⃣ Policy Biases – Subsidies, tax exemptions often benefit the rich more than the poor.

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🔹 Lorenz Curve – A Visual Tool for Inequality 📉

📖 Definition

The Lorenz Curve is a graphical representation of income (or wealth) inequality. It compares the cumulative percentage of income (or wealth) with the cumulative percentage of population.

🔎 How to Draw

1️⃣ Arrange the population from poorest to richest. 2️⃣ Plot the cumulative share of income against the cumulative share of population. 3️⃣ A 45-degree line (Line of Perfect Equality) represents equal income distribution. 4️⃣ The further the Lorenz Curve lies from this line, the higher the inequality.

Example

% Population	% Income (Cumulative)
20%	5%
40%	15%
60%	35%
80%	60%
100%	100%

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Key Interpretation

• Closer to 45-degree line = More equal society.
• Further away from 45-degree line = More unequal society.

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🔹 Gini Coefficient – Numerical Measure of Inequality

📖 Definition

The Gini Coefficient quantifies inequality using the Lorenz Curve. It is the ratio of the area between the Lorenz Curve and the Line of Equality to the total area under the Line of Equality.

Gini=AA+B\text{Gini} = \frac{A}{A + B}

Where:

• A = Area between Lorenz Curve and Line of Equality.
• B = Area under the Lorenz Curve.

🔎 Range and Interpretation

Gini Coefficient	Meaning
0	Perfect equality – Everyone has the same income.
1	Perfect inequality – One person has all the income.
0.4+	High inequality (alert zone).

India’s Gini Coefficient (2023)

• Income Inequality: ~0.48 (High).
• Wealth Inequality: ~0.62 (Very High).

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🔹 Impacts of High Inequality

Economic Impacts 💰

• Slower economic growth.
• Lower consumption demand in the majority population.
• Increased reliance on state welfare programs.

Social Impacts ⚠️

• Social unrest and political instability.
• Erosion of trust in institutions.
• Higher crime rates.

Political Impacts 🏛️

• Influence of wealthy elites on policy-making.
• Weakening of democratic participation.

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🔹 Policy Measures to Reduce Inequality

1️⃣ Progressive Taxation 💰

• Higher taxes on high incomes.
• Wealth taxes on luxury properties, inheritance.

2️⃣ Social Welfare Programs 🏫

• Universal healthcare and education.
• Food and housing support for the poor.

3️⃣ Inclusive Growth Strategies 🌾

• Promoting labour-intensive sectors.
• Supporting small businesses and rural livelihoods.

4️⃣ Strengthening Labour Laws ⚖️

• Ensure minimum wages and social security.
• Protect migrant and informal workers.

5️⃣ Financial Inclusion 🏦

• Expand banking services to rural areas.
• Promote microfinance and women’s SHGs.

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Real-life Example – Inequality in India 🇮🇳

• Top 10% of the population controls ~77% of wealth.
• Bottom 50% owns less than 5% of wealth.
• Regional inequalities: Southern states perform better on HDI than BIMARU states.

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📊 Summary Table – Lorenz Curve vs Gini Coefficient

Feature	Lorenz Curve	Gini Coefficient
Type	Graphical	Numerical
Data Required	Income distribution data	Income distribution data
Representation	Curve	Single number
Ease of Use	Visual but qualitative	Exact numerical indicator

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📚 Practice MCQ

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1️⃣ Consider the following statements regarding Lorenz Curve:

1. It is a graphical representation of income distribution.
2. A Lorenz Curve that is close to the line of equality indicates low inequality.
3. A Lorenz Curve that is far from the line of equality indicates high inequality.
4. It is used to calculate the Gini Coefficient.

Which of the above statements are correct?

✅ Options:
(a) 1 and 2 only
(b) 1, 2, and 3 only
(c) 1, 2, 3, and 4
(d) 2 and 4 only

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2️⃣ Which of the following Gini Coefficient values indicates moderate income inequality?

✅ Options:
(a) 0.10
(b) 0.25
(c) 0.45
(d) 0.90

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3️⃣ Consider the following statements:

1. Gini Coefficient measures inequality in income or wealth distribution.
2. A Gini value of 0 means perfect equality.
3. Gini Coefficient is always expressed in percentage terms.
4. India’s Gini Coefficient is higher for wealth than income.

Which of the above statements are correct?

✅ Options:
(a) 1, 2, and 4 only
(b) 1 and 3 only
(c) 2 and 4 only
(d) 1, 2, 3, and 4

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4️⃣ Which policy tool can reduce economic inequality?

✅ Options:
(a) Regressive taxation
(b) Wealth taxes
(c) Import tariffs
(d) Deregulation of labor laws

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5️⃣ Which factor contributes most significantly to wealth inequality in India?

✅ Options:
(a) Wage disparities
(b) Unequal access to education
(c) Concentration of land and financial assets
(d) Tax evasion