The Gini Coefficient
In one line. The Gini coefficient measures income inequality from 0 (perfect equality) to 1 (perfect inequality), so a lower value means a more equal distribution. It is derived from the Lorenz curve, the area between it and the line of equality. Reported before and after taxes and transfers, it captures the distribution that GDP per capita averages conceal.
Exam relevance: a core A Level Economics topic, on ETG analysis of the last ten years. Taught the way an economics tutor who wrote the answer keys teaches it.
01What the Gini coefficient is
The Gini coefficient is a single number that measures how unequally income is distributed in an economy.
The Gini coefficient is a measure of income inequality that ranges from 0 (perfect equality, everyone has the same income) to 1 (perfect inequality, one person has all the income). A lower value means a more equal distribution.
Inequality matters for the standard of living because an average income figure can hide a wide spread between rich and poor. The Gini turns the spread into one comparable number, so it can be tracked over time and compared across economies. A falling Gini means income is becoming more evenly shared, which is the signature of inclusive growth, where the gains from growth reach lower income groups rather than only the top.
02The Lorenz curve
The Gini coefficient is built from the Lorenz curve, a graph that shows how income is shared across the population.
The Lorenz curve plots the cumulative share of income on the vertical axis against the cumulative share of population on the horizontal axis, ranked from poorest to richest. If income were perfectly equally shared, the poorest 20 per cent would earn 20 per cent of income, the poorest 40 per cent would earn 40 per cent, and so on, tracing a straight 45 degree line of equality. In reality the poorest share earns less than their population share, so the curve sags below the line. The further the Lorenz curve bows away from the line of equality, the more unequal the distribution. Note that this page carries no diagram, because ETG's diagram set does not yet include a Lorenz curve; the reasoning is followed from the description.
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03Reading the coefficient
The Gini coefficient measures the gap between the Lorenz curve and the line of equality, expressed as a number between 0 and 1.
Formally, it is the area between the Lorenz curve and the line of equality, as a proportion of the whole area beneath the line. When the curve sits right on the line, the gap is zero and the Gini is 0: perfect equality. When the curve sags as far as possible, the Gini approaches 1: perfect inequality. So a bigger area, a more bowed curve, means a higher Gini and more inequality. The single most common error is to get the direction wrong: a lower Gini is more equal, not less.
Higher Gini means more unequal; lower Gini means more equal. So a fall in the Gini over time is an improvement in the distribution of income, the result a policy aimed at inclusive growth is looking for.
04Before and after taxes and transfers
The Gini coefficient is reported in two forms, and the gap between them shows how much redistribution the government achieves.
The before figure, sometimes called the market Gini, measures inequality of income from work and capital alone. The after figure measures inequality once taxes and government transfers are taken into account. Because progressive taxes take proportionately more from higher incomes and transfers add to lower incomes, the after figure is usually lower than the before figure. In Singapore, the Gini coefficient was 0.44 before taxes and transfers and 0.39 after them in 2021, so redistribution narrowed the gap. The size of that fall is a direct measure of how much a government's tax and transfer system reduces inequality.
05Why it complements GDP per capita
The Gini coefficient is valuable precisely because it captures what GDP per capita cannot.
Real GDP per capita is an average, and an average tells you nothing about distribution: two economies with identical income per head can be worlds apart in how evenly that income is shared. The Gini coefficient supplies the missing distributional picture, which is why it sits alongside GDP per capita in any serious assessment of the standard of living. It is also the natural indicator for judging inclusive growth, because a policy that lifts the bottom relative to the top shows up as a falling Gini.
06Limitations
The Gini is a powerful summary, but like every single indicator it has blind spots.
As one number it loses detail: two very different Lorenz curves can give the same Gini, so it does not reveal where in the distribution the inequality sits. It measures income, not wealth, which is often far more unequally held. And it says nothing about the absolute living standard, since a poor economy and a rich one can share the same Gini while their people live very differently. For these reasons the Gini is read together with income per head and the non material indicators, not in place of them.
Do not reverse the direction. A lower Gini is more equal, so a falling Gini is an improvement, not a worsening. And do not read the Gini as a measure of how rich a country is: it measures the spread of income, not its level, so a high income and a low income economy can have an identical Gini.
When you cite the Gini, state the direction explicitly, a lower Gini is more equal, and note whether it is before or after taxes and transfers. Then pair it with an absolute income measure, because the Gini shows the spread but not the level.
07Test yourself
- Explain, using the Lorenz curve and the line of equality, what a Gini coefficient of 0.4 represents.
- An economy's Gini falls from 0.45 to 0.40 after taxes and transfers. Explain what this tells you about its redistribution.
- Give two reasons why the Gini coefficient should not be used as the sole measure of the standard of living.
08Questions students ask
The Gini coefficient is a measure of income inequality that runs from 0 to 1. A value of 0 means perfect equality, where everyone has the same income, and a value of 1 means perfect inequality, where one person has all the income. A lower Gini means a more equal distribution, so a falling Gini signals that growth is becoming more inclusive.
The Lorenz curve is a graph that plots the cumulative share of income against the cumulative share of population, against a straight line of perfect equality. The Gini coefficient turns that picture into a single number: it is the area between the Lorenz curve and the line of equality as a proportion of the whole area below the line. The further the curve bows away from the line, the larger the Gini.
Because GDP per capita is an average, and an average hides how income is shared. Two economies with the same income per head can have very different inequality. The Gini coefficient captures the distribution that the average conceals, which is why it is used together with GDP per capita to judge the standard of living.