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Understanding the Lorenz Curve
Lorenz Curve: Definition, Gini Coefficient and Gini in Indonesia
The Lorenz curve was first developed in 1905 by an American economist named Max Lorenz. The Lorenz curve is a graphical representation of economic inequality based on income and wealth disparities. The graph consists of a chart that functions to calculate the percentile of the population on the horizontal axis based on income or wealth, while the vertical axis functions to plot income and wealth cumulatively.Understanding the Gini Coefficient, Its Functions & Weaknesses
Understanding the Concept of the Lorenz Curve
In practice, the Lorenz curve is usually used mathematically where the series of observations of income or wealth are incomplete. The straight diagonal line on the Lorenz curve is often marked with a slope of 1, meaning that the slope represents the equality of the distribution of income and wealth. Although this curve is often used to show the level of economic inequality in a country, it can also be used as an unequal distribution in any system. In economics, the Lorenz curve is also used to show the level of inequality in the distribution of wealth to income.Components In The Lorenz Curve
For example, the US Fed has collected statistical data on net worth from their country, then graphically depicted the inequality of wealth distribution. According to the Fed, the basic data recorded that 50% of US households only have about 1.5% of the wealth of all households. There are several components that are important for you to understand when analyzing using the Lorenz curve, as follows:- The x-axis is denoted as percentile
- The y-axis represents the cumulative percentage.
- The line of equality is usually indicated by a line with a slope of 45 degrees.
Weakness :
Because the Lorenz curve involves fitting a continuation function to an incomplete data set, there is no guarantee that the values along the curve are accurate. This is also because it is possible that the data may be too expensive or require too many resources to collect enough points to fill all the gaps. Other Disadvantages of the Lorenz curve:- The existing data may not accurately reflect the entire population, therefore the Lorenz curve may also be in error.
- Curves may require a complete data set to fill the entire curve data
- It takes time estimation to conclude the preparation of the curve to be created.
Excess :
- Easy-to-understand visuals for calculating gaps between populations
- Also used to help calculate the Gini coefficient.
- Assisting the government in determining policies and calculating taxes based on income distribution.
- Maintaining the anonymity of each individual surveyed
- Can show how the curve changes over time
How to Calculate the Lorenz Curve?
After the data is collected, a Lorenz curve is then fitted to represent the data set. Since each set of information is different, there is no formula for a single universal curve, and nonlinear equations often look different.10 Best Investment Applications in Indonesia and Trusted by OJK
Contoh Soal Kurva Lorenz
The Lorenz Curve image above shows that the curve has been adjusted to data depicting Brazil's national income in 2020. The collection of data is compared with a straight diagonal line as previously explained, that the line refers to equality. At the 55th percentile of income, the curve value reaches 22.39 percentage points, this means that the Lorenz curve concludes that around 55% of the lower economic community gets at least 22.39% of the total distribution of the country's income. If the Brazilian people whose economy is equal, then the bottom 55% will get 55% of the amount.
Next, we can see that the 99th percentile is equivalent to 89.32 percentage points of cumulative income. This means that the top 1% take about 11.68% of Brazil's total income. To find the Gini coefficient, simply subtract the area under the Lorenz curve (about 0.25) from the area of the bottom line of the equality equation (about 0.5). Then, divide the result by the area under the equality line which gives a Gini coefficient of about 0.5 or in percent to 50%. According to the World Bank, it was concluded that Brazil's Gini coefficient in 2020 was about 48.9.
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Above is daily information about the Lorenz curve and examples of questions. Keep updating the latest information through the GIC journal which will be announced every day. You can also trade on the GICTrade application with its latest feature, an ECN account, enjoy the advantages of the latest features with the lowest spread starting from 0! Enjoy a 30% welcome bonus promo to strengthen your fund resilience when trading forex on GICTrade!
