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Income Inequality Lorenz Curve Gini Coefficient By Mike Fladlien Step 1—Raw Data Adrian $ 90.00 Bob 15.00 Cathy 70.00 Derek 200.00 Eddie 125.00 Step 2—Arrange in Ascending Order Bob $15.00 Cathy 70.00 Adrian 90.00 Eddie 125.00 Derek 200.00 Step 3—Find Total Income Bob $ 15.00 Cathy 70.00 Adrian 90.00 Eddie 125.00 Derek 200.00 Total $500.00 Step 4-Find % of Income Bob 15.00 15/500 = 3% Cathy 70.00 70/500 = 14% Adrian 90.00 90/500 = 18% Eddie 125.00 125/500 = 25% Derek 200.00 200/500 = 40% Total $500.00 Step 5 – Find Cumulative % of Income Bob 3% 3% Cathy 14% 17% Adrian 18% 35% Eddie 25% 60% Derek 40% 100% Step 6 - Plot the Data Lorenz Curve Cumm Percent of Income 120 100 80 60 40 20 0 0 20 40 60 80 Cumm Percent of Households 100 120 Step 7 – Find Area Under Lorenz Curve Step 8a - Finding the Gini Coefficient • Subtract Area under Lorenz Curve from .5. • .5 - .33 = .17 • This is the area between perfect equality and Lorenz Curve Step 8b – Find the Gini Coefficient • The Gini Coefficient is found by taking the ratio of the Area capsulated by the area of the right triangle. In this case, .17/.50 or .34. • One could simply multiply by 2 Step 9a--Finding the Gini Coefficient • Gini shows income disparity • A high Gini shows that wealth is concentrated among a few • A low Gini shows more equitable distribution Selected Gini Coefficients The End • Please Visit Me at: www.mikeroeconomics.blogspot.com • Please visit: http://teachingapeconomics.blogspot.com