Gini Coefficient: Notes for UPSC

Gini Coefficient is a measure of the income inequality in a country or between countries. In an economic context, it is important to understand what this coefficient or index is, how is it measured and what is Indiaâ€™s current status, for the IAS exam.

Gini Coefficient – UPSC Notes:-

 For more topics about the economy, or the Indian economy in general, theÂ UPSC Indian Economy NotesÂ will give you the edge needed to prepare for the Economics segment of the UPSC Exams The following links will further help you in your exam preparation:

What is the Gini Coefficient?

In economics, the Gini coefficient, also known as the Gini index or Gini ratio, is a measure of demographic distribution with the aim of projecting the income of a nation’s populace. The Gini coefficient is the most commonly used estimation of inequality.

The Gini Coefficient is named after Italian statistical and sociologist Corrado Gini who developed the coefficient.

How is the Gini Coefficient Measured?

The explanation is given below in points:

• A value of 0 indicates perfect equality (where everybody has the same wealth/income) and 1 indicates perfect inequality (that is, where one person owns all the wealth in a country).
• Practically, the value falls between 0 and 1 for most countries. In countries with high inequality, the value would be close to 1.
• A value below 0.4 is considered acceptable generally.
• There are multiple ways to calculate the Gini Coefficient.
• The two most popular methods are:
• Based on pre-tax (market) income
• Based on disposable income
• The second method takes into account taxes and social spending as well.
• The difference in both methods is an indicator of the efficacy of an economyâ€™s fiscal policy in bringing down the rich-poor divide by means of social spending and taxation.
• Mathematically, the Gini Index is defined based on the Lorenz Curve. The Lorenz Curve is a graphical representation of the distribution of wealth/income. Read more on theÂ Lorenz CurveÂ on the given link.

Gini Coefficient Significance

Gini coefficient is useful because it projects negative values for income and wealth which standard measures of inequality are unable to provide. But it does have its fair share of limitations.

For example, it samples people at random points of their lives, which means that it can’t separate those whose financial futures are reasonably secure from those who do not have prospects, even in a large sample.

Other reasons why it is important is as follows:

• An increase in the Index implies that the governmentâ€™s policies benefit the rich more than the poor and are not inclusive enough.
• So, a higher ratio may encourage the government to spend more on social welfare schemes and also increase the tax burden on the rich.
• It is important that the government tries to maintain a good ratio so that the rich-poor divide can be kept in check.

Gini Coefficient India

• As per the World Bank, Indiaâ€™s Gini Index is 35.2 (0.35) as of March 2020
• Currently, though, it is estimated to be close to 0.50, which is the highest value to date. Lesotho currently holds the distinction of the country having the highest Gini Coefficient at 0.632. The World Bank report indicates that India’s high population and uneven distribution of wealth is responsibly for its low performance in the index

Nations with high Gini Coefficient

The following table gives a ranking of the top 10 nations with a high Gini Coefficient:

Countries with the highest Gini coefficients

 Country Rankings Lesotho 0.632 South Africa 0.625 Haiti 0.608 Botswana 0.605 Namibia 0.597 Zambia 0.575 Comoros 0.559 Hong Kong 0.539 Guatemala 0.530 Paraguay 0.517

You can also get the latest business newsweekly roundup on our Economy This Week segment. Here, you will get:

• Video Lecture on the Weekly Business News
• PDF of the Weekly Business News
• PPT of the Weekly Business News
• Sample UPSC Questions on Economy Topics

The above details would be of help to candidates preparing for UPSC exams. You can know more about the topics asked in the exam by visiting the UPSC Syllabus page and also refer to the links given below for more articles.

Frequently Asked Question â€“ Gini Co-Efficients â€“ Gini Index

Q.1. What is a good Gini â€“ Coefficients?

Ans. Gini index < 0.2 represents perfect income equality, 0.2â€“0.3 relative equality, 0.3â€“0.4 adequate equality, 0.4â€“0.5 big income gap, and above 0.5 represents a severe income gap. Therefore, the warning level of the Gini index is 0.4.

Q.2. What are the top five countries with the highest Gini Coefficients?

Ans. The top 5 countries with the highest Gini coefficients are Lesotho, South Africa, Haiti, Botswana, and Namibia.

Q.3. How is the Gini Coefficient useful?

Ans. The Gini coefficient measures how far the actual Lorenz curve for a societyâ€™s income or wealth is from the line of equality. ItÂ is useful, particularly because it allows negative values for income and wealth, unlike some other measures of inequality.

Q.4. What is the difference between the Gini coefficient and the Gini Index?

Ans. The Gini index is the Gini coefficient expressed as a percentage (%) and is equal to the Gini coefficient multiplied by 100. (The Gini coefficient is equal to half of the relative mean difference.) The Gini coefficient is often used to measure income inequality.

Q 5. What is Gini Coefficient?

Ans. The Gini coefficient also called the Gini index or Gini ratio is a measure of statistical dispersion intended to represent the income inequality or wealth inequality within a nation or any other group of people.