Economics – Characteristics of countries at different levels of development | e-Consult

(a) The Lorenz curve plots the cumulative percentage of total income earned against the cumulative percentage of the population. A perfectly equal distribution would result in a straight diagonal line (the line of perfect equality). The further the Lorenz curve bows away from this line, the greater the income inequality. It visually represents the extent to which income is unevenly distributed. The Gini coefficient is a numerical representation of income inequality, ranging from 0 (perfect equality) to 1 (perfect inequality). It is calculated as the area between the line of perfect equality and the Lorenz curve, divided by the total area under the line of perfect equality. A higher Gini coefficient indicates greater inequality. Both tools allow for comparison of income distribution across different economies and over time. They provide a way to quantify and visualize the extent of disparities in income.

(b) Several limitations exist. Firstly, the Gini coefficient doesn't reveal why inequality exists. It doesn't explain the underlying causes, such as differences in skills, education, or inherited wealth. Secondly, it's sensitive to the income distribution at the extremes. Small changes in income at the very top or bottom can significantly affect the Gini coefficient, even if the overall distribution remains relatively stable. Thirdly, it doesn't account for the well-being of the population. A high Gini coefficient doesn't necessarily mean a society is worse off; it just indicates a greater disparity in income. Furthermore, it can be difficult to compare Gini coefficients across countries with different social welfare systems or tax policies, as these can influence the observed inequality. Finally, it doesn't capture the nuances of different types of inequality (e.g., inequality of opportunity vs. inequality of outcome).