Question

Why is Gini coefficient difficult to understand in microeconomics. Write a paragraph explaining what is difficult to understand about it.

Answer 1

The Gini coefficient also called Gini index or Gini ratio is a statistical way to measure the economic equality of a population. This Gini coefficient is used to measure the distribution of income or wealth among the members of a population.

The Gini coefficient can vary from '0' to'1' (in terms of percentage it is 0 to 100%) . '0' means there is equal distribution of income or wealth among the members of a population that means, every member has the same income whereas, '1' means there is unequal distribution of income or wealth among the members of a population that means, a single person is receiving all the income. In real world the coefficient will never be exactly 0 or 1. The Gini coefficient usually ranges from 24% to 63% in real world. The Gini coefficient is derived from the Lorenz Curve and this curve indicates the economic development of a country.

It is sometimes difficult to understand Gini coefficient because two countries could have different income distributions but the same Gini coefficient. For example, consider a country where half of the households do not have income, and the other half share income equally then, the Gini coefficient will be 0.5 but if we consider an country where there is a complete income equality, except for one rich household who has half of the total income, then, the Gini coefficient will also be 0.5.

Also, while comparing the income distributions across different countries may be difficult because benefits systems may differ from one country to another. For example, there are some countries where the benefits are provided in the form of money while others use food stamps and this food stamps in Lorenz curve might not be considered as an income and therefore the food stamps may not be taken into consideration in Gini coefficient.