Gini Index Explained and Gini Co-efficients Around the World

What Is the Gini Index?

The Gini index, or Gini co-efficient, measures income distribution across a population. Developed by Italian statistician Corrado Gini in 1912, it often serves as a gauge of economic inequality, measuring income distribution or, less commonly, wealth distribution among a population.

The co-efficient ranges from 0 (or 0%) to 1 (or 100%), with 0 representing perfect equality and 1 representing perfect inequality. Values greater than 1 are theoretically possible due to negative income or wealth.

Understanding the Gini Index

A country in which every resident has the same income would have an income Gini co-efficient of 0. Conversely, a country in which one resident earned all the income, while everyone else earned nothing, would have an income Gini co-efficient of 1.

The same analysis can apply to wealth distribution (the wealth Gini co-efficient), but because wealth is more difficult to measure than income, Gini co-efficients usually refer to income and appear simply as the Gini co-efficient or Gini index, without specifying that they refer to income. Wealth Gini co-efficients tend to be much higher than those for income.

Even in affluent countries, the Gini index measures net income rather than net worth, so the majority of a nation’s wealth can still be concentrated in the hands of a small number of people even if income distribution is relatively equal.

The Gini co-efficient is an important tool for analyzing income or wealth distribution within a country or region, but it should not be mistaken for an absolute measurement of income or wealth. A high-income country and a low-income country can have the same Gini co-efficient, as long as incomes are distributed similarly within each. For example, Turkey and the United States both have income Gini co-efficients of around 0.39–0.40, according to the Organisation for Economic Co-operation and Development (OECD), despite Turkey’s vastly lower gross domestic product (GDP) per person.

Graphical Representation of the Gini Index

The Gini index is often represented graphically through the Lorenz curve, as depicted below, which shows income (or wealth) distribution by plotting the population percentile by income on the horizontal axis and cumulative income on the vertical axis. The Gini co-efficient is equal to the area below the line of perfect equality (0.5 by definition) minus the area below the Lorenz curve, divided by the area below the line of perfect equality. In other words, it is double the area between the Lorenz curve and the line of perfect equality.

The Gini Index Around the World

Global Gini

The Gini co-efficient experienced sustained growth during the 19th and 20th centuries. In 1820, the global Gini co-efficient stood at 0.50, while in 1980 and 1992, the figure was 0.657.

Source: The World Bank

COVID-19 is likely to have a further negative impact on income equality. According to The World Bank, the Gini co-efficient has increased about 1.5 points in the five years following major epidemics, such as Ebola and Zika. Economists believe COVID-19 triggered an annual 1.2- to 1.9-percentage-point increase in the Gini co-efficient for 2020 and 2021.

Gini within Countries

Below are the income Gini co-efficients of every country for which the U.S. Central Intelligence Agency (CIA) World Factbook provides data:

Some of the world’s poorest countries have some of the world’s highest Gini co-efficients, while many of the lowest Gini co-efficients are found in wealthier European countries. However, the relationship between income inequality and GDP per capita is not one of perfect negative correlation, and the relationship has varied over time.

Michail Moatsos of Utrecht University and Joery Baten of Tuebingen University show that from 1820 to 1929, inequality rose slightly—then tapered off—as GDP per capita increased. From 1950 to 1970, inequality tended to fall off as GDP per capita rose above a certain threshold. From 1980 to 2000, inequality fell with higher GDP per capita, then curved back up sharply.

Limitations of the Gini Index

Though useful for analyzing economic inequality, the Gini co-efficient has some shortcomings.

The metric’s accuracy is dependent on reliable GDP and income data. Shadow economies and informal economic activity are present in every country. Informal economic activity tends to represent a larger portion of true economic production in developing countries and at the lower end of the income distribution within countries. In both cases, this means that the Gini index of measured incomes will overstate true income inequality. Accurate wealth data is even more difficult to come by due to the popularity of tax havens.

Another flaw is that very different income distributions can result in identical Gini co-efficients. Because the Gini attempts to distill a two-dimensional area (the gap between the Lorenz curve and the equality line) down to a single number, it obscures information about the shape of inequality. In everyday terms, this would be similar to describing the contents of a photo solely by its length along one edge, or the simple average brightness value of the pixels.

Though using the Lorenz curve as a supplement can provide more information in this respect, it also does not show demographic variations among subgroups within the distribution, such as the distribution of incomes across age, race, or social groups. In that vein, understanding demographics can be important for understanding what a given Gini co-efficient represents. For example, a large retired population pushes the Gini higher.

The Bottom Line

If the gap between rich and poor continues to increase, the evaluation of the income gap can become more important. And the Gini index can provide a great starting point when it comes to measuring that income inequality. Knowing the Gini index numbers is no panacea, but this measure does provide a way to quantify and track the direction in which a society is moving, which may open the door for dialogue and potential solutions.

But keep in mind that there are limitations associated with using this measure. The co-efficient is only as reliable as the data used to calculate it, and it only provides a single-digit reading, which doesn’t take different groups in the sample into account.