Economic Inequality (Unit 2 Topic 2)
Lorenz Curve and Gini Coefficient
Lorenz Curve, Gini Coefficient and the Quintile Ratio
These tools measure income inequality within an economy, giving governments and economists evidence to evaluate distributional outcomes and design policy responses.
What they are
The Lorenz Curve plots the cumulative share of income received against the cumulative share of the population, ranked from poorest to richest. A perfectly equal society produces a 45-degree diagonal. The further the curve bows away from that line, the greater the inequality.
The Gini Coefficient quantifies this by measuring the area between the curve and the line of perfect equality, expressed as a value between 0 (perfect equality) and 1 (perfect inequality). Higher values indicate greater concentration of income among top earners.
The Quintile Ratio (S80/S20) divides the income share of the richest 20% by that of the poorest 20%. It reads exactly off quintile data and is blunt but transparent — Norway sits near 3.4×, South Africa above 50×.
The Palma Ratio is a close relative, comparing the richest 20% against the poorest 40%, on the evidence that middle-income groups receive a relatively stable share across countries. It needs finer data than quintiles provide, which is why this model reports the quintile ratio instead.
Using the interactive
Load a country, then drag a quintile slider. Shares always total 100%, so raising one quintile takes the difference from those above it — watch area A grow and the Gini climb.
Why measuring inequality matters
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Persistent inequality reduces social mobility, undermines economic participation, increases poverty and weakens social cohesion.
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High inequality correlates with poorer health outcomes, higher crime rates and reduced intergenerational opportunity — the strongest relationship, sometimes called the Great Gatsby curve, is that unequal societies tend to be immobile ones, where a child's income is largely predicted by their parents'.
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There is an efficiency cost, not just an equity one. Households on low incomes spend a higher proportion of any extra dollar, so a more even distribution supports aggregate demand. Talented children in poor households who never reach their potential represent human capital left undeveloped — productive capacity forgone, and a production possibility curve sitting further in than it needs to.
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Some inequality is unavoidable and even useful: differences in reward provide incentives to work, study, take risks and start businesses. The policy question is therefore not how to eliminate inequality but how much a society will accept, and whether it stems from unequal opportunity or unequal outcome.
Policy responses
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Progressive taxation — higher income earners paying proportionally more. Effectiveness depends on the average rate actually paid rather than the headline marginal rate, since deductions and avoidance narrow the base.
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Transfer payments — welfare, pensions and unemployment benefits redistributing income. Targeting payments to those most in need is efficient, but withdrawing them as earnings rise creates high effective marginal tax rates, which can discourage additional work.
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Investment in public services — healthcare, education and housing. This "social wage" never appears in income statistics, so measured Gini coefficients tend to overstate inequality in countries with strong universal services.
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Minimum wage legislation — lifting incomes at the bottom of the distribution. As a price floor in the labour market, a minimum set above the market-clearing wage risks a surplus of labour, so the gain to those employed is weighed against the risk to those who are not.
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Compare the market income Gini with the disposable income Gini. The gap between them measures how much redistribution a government is actually achieving.