Notes on how to compute Gini Coefficient

Suppose you are given data like this:

 The lowest 10% of earners make 2% of all wages

 The next 40% of earners make 18% of all wages
 The next 40% of earners make 30% of all wages
 The highest 10% of earners make 50% of all wages

The Gini coefficient requires you to construct a Lorenz curve that would look
like this:

Fraction of income
A

Fraction of population
Then you have to determine what fraction of the triangle is made up of area A.
 How to Solve it More Simply

You can solve it geometrically, which would involve solving for the areas of
several triangle and trapezoids and adding them up. Here is an alternative
way to solve it.

Step 1: Organize the data into the following table:

Fraction of % of Population
Fraction of Income Score
Population that is Richer
0.02 0.10
0.18 0.40
0.30 0.40
0.50 0.10

Step 2: Fill in the “% of Population that is Richer” column by adding all the
“Fraction of Population” terms below that row
 How to Solve it More Simply

Implementing Step 2 gives:

Fraction of % of Population
Fraction of Income Score
Population that is Richer
0.02 0.10 0.90
0.18 0.40 0.50
0.30 0.40 0.10
0.50 0.10 0

Step 3: Compute “Score”. Score is given by:

Score = Fraction of Income * (Fraction of Population + 2 * % of Population Richer)

 How to Solve it More Simply

Implementing Step 3 gives:

Fraction of % of Population
Fraction of Income Score
Population that is Richer
0.02 0.10 0.90 0.038
0.18 0.40 0.50 0.252
0.30 0.40 0.10 0.180
0.50 0.10 0 0.050

Step 4: Add up all the terms in the “Score” column. Call that “Total”.

In this example, we get 0.520

Step 5: Gini Coefficient = 1 – Total.

In this example, we get 1 – 0.520 = 0.480

Conclusion: The Gini Coefficient is 0.480

 Notes on this Method
 It is important to organize the rows going from poorest to richest. When I give
you questions, they will always be given to you that way.

 The intuition for the “Score” formula comes from the fact that we are
computing the areas of a bunch of trapezoids. The area of a trapezoid is:
Height * (Base at top + Base at bottom) / 2. The very last step of our calculation
of the Gini is to divide by the area of the triangle which is ½. So: Area of
Trapezoid / (1/2) = 2*Height*(Base at top + Base at bottom). In our calculation,
the fraction of wealth is the height of the trapezoid, and the bases are “fraction
of population that is richer than this group” and “fraction of population that is
richer + this group’s fraction of population”
 Extra Practice 1

Fraction of % of Population
Fraction of Income Score
Population that is Richer
0.10 0.25
0.15 0.25
0.35 0.25
0.40 0.25

Recall:

Score = Fraction of Income * (Fraction of Population + 2 * % of Population Richer)

Total = Sum of Scores

Gini = 1 – Total

ANSWER ON NEXT SLIDE

 Extra Practice 1

Fraction of % of Population
Fraction of Income Score
Population that is Richer
0.10 0.25 0.75 0.1750
0.15 0.25 0.50 0.1875
0.35 0.25 0.25 0.2625
0.40 0.25 0 0.1000

Total = 0.7250

Gini = 0.2750
 Extra Practice 2

Fraction of % of Population
Fraction of Income Score
Population that is Richer
0.01 0.10
0.04 0.10
0.10 0.30
0.30 0.30
0.20 0.10
0.35 0.10

ANSWER ON NEXT SLIDE

 Extra Practice 2

Fraction of % of Population
Fraction of Income Score
Population that is Richer
0.01 0.10 0.90 0.019
0.04 0.10 0.80 0.068
0.10 0.30 0.50 0.130
0.30 0.30 0.20 0.210
0.20 0.10 0.10 0.060
0.35 0.10 0 0.035

Total = 0.522

Gini = 0.478
 Extra Practice 3

Fraction of % of Population
Fraction of Income Score
Population that is Richer
0.02 0.10
0.03 0.05
0.10 0.15
0.50 0.50
0.35 0.20

ANSWER ON NEXT SLIDE

 Extra Practice 3

Fraction of % of Population
Fraction of Income Score
Population that is Richer
0.02 0.10 0.90 0.0380
0.03 0.05 0.85 0.0525
0.10 0.15 0.70 0.1550
0.50 0.50 0.20 0.4500
0.35 0.20 0 0.0700

Total = 0.7655

Gini = 0.2345