Lorenz Curve

Understanding the Lorenz curve 

The Lorenz curve is a graph illustrating the distribution of income or wealth in a population, developed by economist Max Lorenz in 1905. It displays the population percentage based on their income level on the x-axis and the cumulative percentage of income on the y-axis. 

Lorenz Curve Details 

The Lorenz curve plots the cumulative percentage of population against the cumulative percentage of income. A straight diagonal line signifies perfect equality of wealth distribution while the curved line depicts the actual, usually unequal, distribution. The more the curve deviates from the straight line, the more unequal the distribution. 

The area between the straight and curved lines helps calculate the Gini coefficient, which reflects inequality. It ranges from 0 to 1, where 0 is perfect equality and 1 is absolute inequality. The Gini coefficient is the proportion of the area between the straight and curved lines to the total area under the straight line. 

The Lorenz curve is based on empirical data like tax returns or surveys, which may not cover the complete population or may have errors. The accuracy of the Lorenz curve and the Gini coefficient depends on the data quality and the method used to fit a function to the data.