The Lorenz curve is a graphical representation of wealth or income distribution used to represent economic inequality. It plots the cumulative percentages of total income or wealth against the cumulative number of recipients starting from the poorest individual or household. The further the Lorenz curve deviates from the line of perfect equality, the higher the economic inequality. The Gini coefficient measures the area between the Lorenz curve and the line of perfect equality to quantify inequality on a scale from 0 to 1. Constructing a Lorenz curve involves fitting data to a continuous function, so the shape can be sensitive to data quality and assumptions.
The Lorenz curve is a graphical representation of wealth or income distribution used to represent economic inequality. It plots the cumulative percentages of total income or wealth against the cumulative number of recipients starting from the poorest individual or household. The further the Lorenz curve deviates from the line of perfect equality, the higher the economic inequality. The Gini coefficient measures the area between the Lorenz curve and the line of perfect equality to quantify inequality on a scale from 0 to 1. Constructing a Lorenz curve involves fitting data to a continuous function, so the shape can be sensitive to data quality and assumptions.
The Lorenz curve is a graphical representation of wealth or income distribution used to represent economic inequality. It plots the cumulative percentages of total income or wealth against the cumulative number of recipients starting from the poorest individual or household. The further the Lorenz curve deviates from the line of perfect equality, the higher the economic inequality. The Gini coefficient measures the area between the Lorenz curve and the line of perfect equality to quantify inequality on a scale from 0 to 1. Constructing a Lorenz curve involves fitting data to a continuous function, so the shape can be sensitive to data quality and assumptions.
The Lorenz curve is a graphical representation of wealth or income distribution used to represent economic inequality. It plots the cumulative percentages of total income or wealth against the cumulative number of recipients starting from the poorest individual or household. The further the Lorenz curve deviates from the line of perfect equality, the higher the economic inequality. The Gini coefficient measures the area between the Lorenz curve and the line of perfect equality to quantify inequality on a scale from 0 to 1. Constructing a Lorenz curve involves fitting data to a continuous function, so the shape can be sensitive to data quality and assumptions.
The Lorenz curve was developed by Max O. Lorenz in 1905 to represent inequality in wealth distribution. In other words, it is a graphical representation of the distribution of income or wealth.
Explanation of Lorenz Curve
The Lorenz curve is represented by a straight diagonal line, which represents perfect equality in income or wealth distribution; the Lorenz curve lies beneath it, showing estimated distribution. The area that is between the straight line and the curved line is the Gini coefficient. The Gini Coefficient itself is expressed as a representation of the scalar measurement of inequality. In the Lorenz Curve, the Gini Coefficient is expressed as the ratio of the area under the straight line
The Lorenz curve is used to represent economic inequality as well as unequal wealth distribution. The farther away the curved line is way from the straight diagonal line, the higher the level of inequality.
Constructing a Lorenz curve involves fitting a continuous function to some incomplete
set of data, there is no guarantee that the values along a Lorenz curve (other than those actually observed in the data) actually correspond to the true distributions of income.
Most of the points along the curve are just guesses based on the shape of the curve that best fits the observed data points. So the shape of the Lorenz curve can be sensitive to the quality and sample size of the data and to the mathematical assumptions and judgments as to what constitutes the best fit curve, and these may represent sources of substantial error between the Lorenz curve and the actual distribution. The curve (B) is a graph showing the proportion of overall income or wealth assumed by the bottom x% of the people, although this is not rigorously true for a finite population. It is often used to represent income distribution, where it shows for the bottom x% of households, what percentage, represented by a straight line – A, (y%) of the total income they have. The percentage of households is plotted on the x-axis, the percentage of income on the y-axis. It can also be used to show the distribution of assets. In such use, many economists consider it to be a measure of social inequality.
The Gini coefficient is the ratio of the area between the line of perfect equality and the observed Lorenz curve to the area between the line of perfect equality and the line of perfect inequality.
