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IB DP Economics — Unit 3: Macroeconomics | SL | 3.4 Economics of Inequality and Poverty
📋 What You Will Learn
- Define income inequality, the Lorenz curve, and the Gini coefficient
- Explain how the Lorenz curve is constructed and what its shape reveals about income distribution
- Analyse the relationship between the Lorenz curve and the Gini coefficient
- Apply the Gini coefficient to compare inequality across countries and over time
- Evaluate the strengths and limitations of the Lorenz curve and Gini coefficient as measures of inequality
🔍 Guiding Question How useful are the Lorenz curve and Gini coefficient as tools for measuring and comparing income inequality, and what do they fail to capture?
🌍 Why This Matters In 2023, South Africa recorded a Gini coefficient of approximately 0.63 — one of the highest in the world — meaning the bottom 50% of the population earned less than 7% of total national income. Meanwhile, Denmark's Gini stood at around 0.29. Both countries have functioning market economies, yet the lived experience of inequality is radically different. The Lorenz curve and Gini coefficient are the tools economists use to make these comparisons precise.
Why Measure Inequality?
GDP per capita tells us the average income in a country — but averages conceal distribution. A country where one person earns $1 million and nine earn nothing has the same average as one where all ten earn $100,000. To understand how income is actually shared across a population, economists need distributional measures.
- Income inequality refers to the unequal distribution of income among individuals or households in an economy
- High inequality can reduce social mobility, undermine political stability, and limit access to education and healthcare for lower-income groups
- Policymakers use inequality measures to design redistribution policies (progressive taxation, transfers, social spending)
- Two key tools: the Lorenz curve (graphical) and the Gini coefficient (numerical)
📖 Definition — Income Inequality Income inequality refers to the extent to which income is unevenly distributed among the members of a population. It is typically measured by comparing the share of total income received by different groups (e.g. quintiles or deciles) of the population ranked by income.
The Lorenz Curve
The Lorenz curve translates raw income distribution data into a visual representation. It was developed by American economist Max Lorenz in 1905 and remains the standard graphical tool for depicting inequality.
📖 Definition — Lorenz Curve The Lorenz curve is a graphical representation of income (or wealth) distribution. It plots the cumulative percentage of total income received against the cumulative percentage of the population, ranked from lowest to highest income. The further the Lorenz curve lies from the line of perfect equality, the greater the degree of inequality.
How to Construct a Lorenz Curve
- Step 1: Rank all households (or individuals) from lowest to highest income
- Step 2: Divide the population into equal groups — typically quintiles (fifths) or deciles (tenths)
- Step 3: Calculate the cumulative share of total income received by each cumulative