Lorenz Curve

Reviewed by Vineeth | Updated on Aug 27, 2020

Introduction

Lorenz curve is a pictorial portrayal of inequality in income or inequality in wealth. It was developed by Max Lorenz in the year 1905. Mr Lorenz was an American economist. The graph outlines wealth or income against the population on the horizontal axis, while the vertical axis depicts income or wealth. Therefore, an x value of 54 and a y value of 12.4 says that the bottom 54% of the total population is in control of 12.4% of the overall wealth or income.

A Lorenz curve is generally co-occurred with a straight line having a slope of 1 and depict absolute balance in wealth or income distribution. The Lorenz curve lies underneath and represents the real distribution. The area across the straight and curved line is the Gini coefficient. It expressed as a ratio of the area below the straight line. The Gini Coefficient is one of the measurements of inequality.

Why Lorenz Curve is important?

Lorenz curve is mostly used in representing economic inequality. However, it can also be used in representing inequalities in the distribution in any process or system. The level of unequal distribution increases when the Lorenz curve drifts away from the baseline. In economics, the Lorenz curve is used to represent inequality of either income or wealth. Note that wealth and income should not be used synonymously as it is possible that an individual with high net worth can have low income and an individual with a high income have a low net worth.

Industry Impact

The Gini coefficient, which is used to show the level of inequality ranges between 0%(0) to 100% (1). A Gini coefficient of 0 correlates to absolute equality. This says that all individuals possess an equal amount of wealth or income. The absolute equality which is plotted as a Lorenz curve is a straight diagonal line whose slope is always 1. This is because the area across the curve will be zero, and hence the Gini coefficient will also turn out to be a zero. A Gini coefficient of 1 shows that one individual account for all the incomes earned or all the wealth.

Conclusion

Lorenz curve is typically used to describe inequality in the income. It can also be used to depict inequality in other systems. The area between the straight and curved lines represent the Gini coefficient.