Question

Explain three methods of measuring income inequality of a nation.

Answer 1

The methods used for measuring income inequality are:-

A) Gini Coefficient:-

This measures inequality across the whole society rather than simply comparing different income.

It says that if all income goes to the single person and others get nothing, then the Gini coefficient will be equal to 1. If we considered that income was shared equally, then Gini coefficient will be 0. The lower the Gini value the lower is the inequality.

B) Ratio measures:-

It shows that how much a person at one level has compared to the level person. Suppose the ratio measure is 20:20, this compares the income of the top 20% with the income of the bottom 20%.

C) Palma ratio:-

It shows the comparison of the top 10% to the bottom 40% of the people.