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Explain three methods of measuring income inequality of a nation

Explain three methods of measuring income inequality of a nation

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Answer #1

The three methods are :

1) Lorenz curve - It is a graphical representation of nation's income distribution. In it , it shows a 45 degrees straight line representing perfect income equality. Lorenz curve lies below this straight line showing the level of income inequality in a nation. The wider the gap between them, the more income inequality there is.

2) Gini coefficient - It is a statistical measure of income distribution. The value of its coefficient ranges from 0 to 1. 0 represents perfect equality of income and 1 represents perfect inequality of income.

3) Palma ratio - It is a measure of income inequality. It divides the income share of top 10% by that of the bottom 40%. In more equal societies this ratio can be one or less and in very unequal societies, this ratio can be as large as 7.

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