The Gini index (i.e. the Gini coefficient) is a statistical measure of distribution, developed by Corrado Gini in 1912. In an economic context it is commonly used as an index of economic inequality that measures income or wealth distribution among the population. The index ranges from 0 to 1, although it is quite common to report the numbers as percentages (i.e. 0 – 100). In general, an index of 0 represents perfect equality, whereas an index of 1 (or 100) describes perfect inequality. Now, let’s find out what this Gini index is all about.
The Gini Index and its Limitations
As mentioned above, the Gini index is mainly used to measure income or wealth distribution within a country or economic region. However, the Income Gini index (i.e. the Gini index measuring income distribution) is much more common than the Wealth Gini index. The reason for this is that wealth is more difficult to measure than income. Thus, unless stated otherwise, the term Gini index usually refers to the Income Gini index.
While the index measures distribution, it is important to note that it does not tell us anything about the absolute level of income (or wealth) in a country. Simply put, two countries with significantly different levels of income, like the United States (GDP per capita: USD 59,531.70) and El Salvador (GDP per capita: USD 3,889.30) can have similar Gini Indexes (US: 41.5, El Salvador: 40.0) as long as the income is distributed in a similar way. Thus, to compare absolute levels of income, indicators like GDP per capita (see also top 10 countries by per capita GDP) are more useful.
Graphical Representation (Lorenz curve)
The Gini Index can be graphically represented with the help of a so-called Lorenz curve. A Lorenz curve illustrates income distribution by plotting the cumulative share of the population from lowest to highest incomes on the x-axis and the cumulative share of total income on the y-axis. That is, it shows what percentage of the population owns what share of total income. Check out the example below for reference.
In this illustration, the Perfect Equality Line represents a perfect distribution of income. That is, a situation where 25% of the population earn 25% of total income, 50% earn 50% and so on. Meanwhile, the Lorenz curve shows the actual distribution of income. As you can see, in this example, the lowest 25% of the population (by income) only earn about 10% of total income, whereas the highest 25% earn about 45% of total income.
The Gini index is represented by the area between the Perfect Equality Line and the Lorenz Curve (A) divided by the area below the Perfect Equality Line (A + B). That means, we can use the following formula to calcualte the index A/(A+B). In addition to that, this formula beautifully illustrates why more inequality leads to a higher Gini index and vice versa. As inequality increases, area A grows (and B decreases accordingly). As a result, A/(A+B) moves closer to 1. Meanwhile, as inequality decreases, area A becomes smaller (and B grows) which pushes the index towards 0.
Gini Index Rankings
Most countries to not officially report the Gini index every year. Therefore, it can be quite difficult to come up with a comprehensive global ranking. In fact, most Gini rankings you’ll find are based on data from various years. Thus, they should be taken with a grain of salt, as some numbers may be more accurate than others.
With that being said, the CIA World Factbook provides an extensive list of countries ranked by Gini index (family income). According to this list, income is most equally distributed in the Faroe Islands, Kosovo, Slovakia, Slovenia, and Sweden. Meanwhile the countries with the highest inequality in terms of income distribution are Lesotho, South Africa, Micronesia, Haiti, and Botswana. For the full list, visit the CIA World Factbook Gini Index. Again, please note that even though most numbers are accurate and up-to-date, some of them are estimates or date back all the way to 1995.
In a Nutshell
The Gini index (i.e. Gini coefficient) is a statistical measure of distribution. It is commonly used as an index of economic inequality that measures income or wealth distribution among the population. The Income Gini Index is more popular than the Wealth Gini index, because it is much easier to measure income as opposed to wealth. The index ranges from 0 to 1 (or 0 – 100 in percent). An index of 0 represents perfect equality, whereas an index of 1 (or 100) describes perfect inequality.