Definition
The Gini coefficient is usually defined mathematically based on the Lorenz curve, which plots the proportion of the total income of the population (y axis) that is cumulatively earned by the bottom x% of the population (see diagram). The line at 45 degrees thus represents perfect equality of incomes. The Gini coefficient can then be thought of as the ratio of the area that lies between the line of equality and the Lorenz curve (marked A in the diagram) over the total area under the line of equality (marked A and B in the diagram); i.e., G = A / (A + B).
The Gini coefficient can theoretically range from 0 to 1; it is sometimes expressed as a percentage ranging between 0 and 100. In practice, both extreme values are not quite reached.
A low Gini coefficient indicates a more equal distribution, with 0 corresponding to complete equality, while higher Gini coefficients indicate more unequal distribution, with 1 corresponding to complete inequality. To be validly computed, no negative goods can be distributed. Thus, if the Gini coefficient is being used to describe household income inequality, then no household can have a negative income. When used as a measure of income inequality, the most unequal society will be one in which a single person receives 100% of the total income and the remaining people receive none (G = 1); and the most equal society will be one in which every person receives the same income (G = 0).
An alternative approach would be to consider the Gini coefficient as half of the relative mean difference, which is a mathematical equivalence. The mean difference is the average absolute difference between two items selected randomly from a population, and the relative mean difference is the mean difference divided by the average, to normalize for scale.
Read more about this topic: Gini Coefficient
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