The Gini co-efficient is often used to measure income inequality. The following describes how it is constructed.
This first chart shows perfect income equality, in which each cumulative percent of earners earn exactly their percent of income.
For example, suppose a country has 100 people. Each person earns $1,000. The total income of everyone put together is $100,000. In this country, ten people together earn $10,000. So, 10% of the population earns 10% of the income. Twenty people together earn $20,000, so 20% of the population earns 20% of the income. Thirty percent of the population earn 30% of the income, and so on.
Each cumulative percent of the population (10%, 20%, 30% and so on) earns exactly that percent of the total national income.
In this next chart, showing some inequality, 40% of wage earners earn 20% of the wages, 50% of earners earn 25% of wages, 60% earn 35%, and 80% earn 60% of income.
In a table, the distribution would look like this:
Percent of Wage Earners
| Percent of Wages Earned|
That is, each cumulative percent of the population earns less than their 'fair share' of income.
Finally, this last chart shows much more inequality. Here, 80% of wage earners only earn 25% of all income. On the other hand, a small percent of the people are earning a large percent of the income, much more than their 'fair share'.
Inequality is calculated by finding out how far away the cumulative income line is from the ideal line (the straight diagonal line). The further away, or the larger the area between the lines, the higher is the inequality.
The gini coefficient is often used to measure Income Inequality.