What Does a Lorenz Curve Show?
Learn what a Lorenz curve shows, how to read its axes and equality line, and how the Gini coefficient measures income inequality in A Level Economics.
A Lorenz curve shows how evenly income or wealth is distributed across a population. It plots the cumulative percentage of income or wealth received against the cumulative percentage of people, ordered from poorest to richest. The further the curve lies below the line of perfect equality, the more unequal the distribution.
For Cambridge International A Level Economics, this is part of International economic issues, under income distribution in Characteristics of countries at different levels of development (11.4.2). That point covers Lorenz curve analysis and calculation of the Gini coefficient.
How to read it
The horizontal axis shows the cumulative percentage of the population, starting with the poorest people. The vertical axis shows the cumulative percentage of total income or wealth they receive. A straight diagonal line represents perfect equality: for example, the poorest 50%50\%50% of people would receive 50%50\%50% of total income.
Suppose instead that the poorest 50%50\%50% receive just 20%20\%20% of income. The Lorenz curve passes through that point below the equality line. This tells you that income is unequally distributed, but it does not, on its own, explain why.
The Gini coefficient summarises the gap between the Lorenz curve and the equality line. It is the area between those lines divided by the whole area beneath the equality line. For example, if those areas are 0.150.150.15 and 0.500.500.50, the Gini coefficient is 0.15÷0.50=0.300.15\div 0.50=0.300.15÷0.50=0.30. A larger coefficient indicates greater inequality.
Exam mistake to avoid: the axes show cumulative shares, not an individual person’s income. Also, when comparing two curves, the one farther from the equality line generally shows greater inequality; do not mistake a lower curve for lower income overall.
