The Lorenz curve and its role in the economy

The Lorenz curve is a graph that shows the degree of inequality in the society, the industry, in the distribution of income and wealth.

In the late 19th century - early 20th century inequalityincome has been the object of research of many leading economists of Western Europe and America. The main problem of the study was the evaluation of the effectiveness and fairness of the distribution of wealth and incomes prevailing in a market economy. In 1905, Max Lorenz, an American statistician, developed his own way of estimating the distribution of income, which became known as the "Lorentz curve."

On the chart, the abscissa is plottedof the country's population as a percentage of the total number, and on the ordinate axis - the share of revenues as a percentage of total income. From the graph it can be seen that inequality in the division of incomes invariably exists in society. For example, the first 20% of the country's population receive only 5% of income, 30% of the population - 10% of income, 50% - 25% of income and so on. The Lorentz curve shows the share of income attributable to different population groups, formed by the size of the income received.

In the event that there was aa uniform distribution of income, then the curve would be straight (the bisector of the angle between the abscissa axis and the ordinate axis). This line is called absolute equality. Absolute equality is possible only in theory. This line shows that any certain percentage of families will receive an appropriate percentage of income. That is, if 20%, 50%, 70% of the population get 20%, 50%, 70% of the total income, then the corresponding points are located on the bisector. And in the event that all the income was accounted for by 1% of the country's population, then on the chart such a situation would be reflected by a vertical line - absolute inequality. Thus, the Lorentz curve allows you to compare the distribution of income between different population groups or at different time periods.

Based on the graph, the Ginny coefficient is derived. Thus, the Lorentz curve and the Gini coefficient are closely interrelated.

The Gini coefficient is aa quantitative indicator reflecting the degree of inequality of different income distribution options. The ratio was developed by Corrado Gini, an Italian economist, demographer and statistician.

The less evenly distributed the income, thecloser will be the Gini coefficient to unity. The unit corresponds to the absolute inequality. Accordingly, the more uniform the distribution, the coefficient will be closer to zero. Zero corresponds to absolute equality. Transfer payment systems and progressive taxation are capable of bringing the distribution closer to the line of absolute equality. As the experience of developed countries shows, over time inequality in the distribution of income is reduced.

Another fairly commonindicators of income distribution is the decile coefficient. It shows the ratio between the averaged income of ten percent of the highest paid population in the country and the averaged income of ten percent of the least well-off.

For the Russian transition economy of the ninetiesyears was characterized by a trend of increasing income differentiation. At the end of 1991, the decile coefficient was 5.4, in 1995 it increased to 13.4, and in 1998 to 13.5. The Gini coefficient rose to 0.376 in 1998 from 0.256 in 1991. Differentiation of incomes, as a rule, is accompanied by a difference in the wages of workers in certain industries and spheres of activity. Interprofessional and sectoral differentiation of payment levels in a market economy shows the public utility of activities, is a guide to employment, and training.