Unit 3: Income Equality & Lorenz Curve Flashcards
Low Income Cut-Off
Low Income Cut-Off (LICO) is a measure that determines the income threshold below which a family will likely devote a larger share of its income on necessities (food, shelter, clothing) than the average family
The approach is to essentially estimate an income threshold at which families are expected to spend 20% more than the average family on necessities
LICOs were first published in 1967 as part of the 1961 Census monograph series
This is by far Statistic Canada’s most established and widely recognized approach to estimating low income cut-offs
Why LICO is important
This gives media, researchers, and policy-makers an idea of the extent to which individuals and the population are living in poverty
Low income cut-off essentially can be used to determine the poverty line
The number to the right show the 2017 LICOs for families of 1 to 7
The Lorenz Curve
One method of measuring the degree of income inequality is the Lorenz Curve
It is a graph on which the cumulative percentage of total national income (or some other variable) is plotted against the cumulative percentage of the corresponding population (ranked in increasing size of share)
The extent to which the curve sags below a straight line indicates the degree of inequality of distribution
Plotting the Lorenz Curve
Step One: label x axis: cumulative % of population and y axis: cumulative % of income
Second Step: plot perfect equality, which is where income is distributed equally to each person
This will always be a 45 degree angle
1:1 ratio of % of income to % of population
Step three: graph each quintile of income for each country
Then draw a curve, connecting the dots, for each country
Label curve as the lorenz curve if only one country is being plotted
Label each curve with the countries name if more than one country is being plotted
The Gini Coefficient
The Gini Coefficient uses the same data as the Lorenz coefficient, but instead of providing a visual (graph), it gives a mathematical number
The Gini Coefficient measures how much distance there is between a countries lorenz curve and the line of perfect equality, compared to how much distance there could be
Formula; Gini Coefficient; Section A/Section A+Section B
Section A is the total area between a
country’s lorenz curve and the line of perfect equality
Section B is the total area
below a country’s lorenz curve
Section A + B is the total area
below the line of perfect equality
Interpreting Gini Coefficients
- 0 represents perfect equality
- 1 represents perfect inequality
Therefore, the closer a country is to zero, the more equal that country is in terms of income distribution
