Distribution of Income

Measurement

Strictly speaking, Australia does not maintain a measurable “goal” for the distribution of income. It is measured through the use of irregular surveys of the Australian economy, including one on one questionnaires and summaries of information provided through income tax returns.

Once this data is collected, statisticians will create a graph known as a Lorenz curve. A Lorenz curve is a graphical representation of the level of equality in income distribution in a country.

For example, assume that the data revealed that the bottom 10% of households received only 1% of the income, while the top 10% of households actually received 40% of the income. Clearly in this case the distribution is inequitable. The resulting Lorenz curve may look something like this:

The egalitarian line represents the line of absolute equality – that is what the Lorenz curve would look like if each 1% of the population received 1% of the income. The reality is that this is never the case. On the Lorenz curve above we can see that 50% of the population shares around 20% of the income. This means that the top 50% of the population is receiving 80% of the income, and so we have a certain degree of inequality.

Economists measure the inequality that is evident on the Lorenz curve with a statistic known as the Gini co-efficient. The Gini co-efficient is a measure of the area between the Lorenz curve and the egalitarian line as compared to the total area under the egalitarian line.

If you look at the graph above once more, you will see the letters A and B in these two areas. We calculate the Gini co-efficient by finding the area of A and B, and then using those numbers in this formula:

A + B

The answer will be a number that is between 0 and 1. As the Gini co-efficient approaches 0, we see that the Lorenz curve is moving closer to the line of absolute equality. As such, the closer to 0, the more equal the distribution of income will be. On the other hand, if the Lorenz curve moves further away from the egalitarian line then the Gini co-efficient will approach 1, and this indicates a greater degree of inequality.

The Lorenz curve and the Gini co-efficient can be used to show the distribution of any type of income. Based on the definitions that you have seen on the previous page, you can quickly see that the distribution of factor income will be more inequitable than the distribution of final income.

Current Page: Measurement