Economia

Another sub-topic generally left untouched at the A-Levels (at least for me) is the Lorentz curve. The Lorentz curve, as seen below, is named after the American statistician M.D. Lorentz, and is a curve that shows the proportion of national income earned by a given percentage of the population. It provides a visual representation of the (in)equality of distribution of income of a particular population.

The horizontal axis indicates the percentage of the population, from poorest to richest, while the vertical axis indicates the percentage of national income that a given percentage of the population receives. Therefore, complete equality is indicated by a straight 45 degree line through the origin, as any point on the line will correspond with a given percentage of the population earning the same percentage of national income, e.g. the poorest 50% earning 50% of national income.

But generally, lines are exceptions when it comes to the Lorentz curves. It’s far more realistic for Lorentz curves to actually look like curves that point “inwards”, i.e. towards the bottom right, as that indicates a non-zero degree of inequality. In a situation of perfect inequality, where national income is completely channeled to 1 person, the curve would look like a reverse ‘L’.

Normally though, the curves themselves are insufficient for use as it isn’t really conclusive (or easy, for that matter) using one’s eyes to judge different Lorentz curves. Of course, the curves can be expressed as mathematical functions (e.g. quadratic functions), making it possible to integrate the area under the curves, and thus, allowing us to compare areas as a means of comparing the degree of inequality. But there is a more effective and popular way of precisely measuring the degree of inequality indicated on a Lorentz curve, and that is the Gini coefficient.

But an explanation of the Gini coefficient is probably too long to fit in this post, so I’ll leave it for another one.