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Another way of evaluating the distribution of income is a Lorenz curve. To graph a Lorenz curve, the percentage of households is placed on the horizontal axis and the percentage of total income is found on the vertical axis.
Thus, in the above graph, on every point on the blue diagonal line (called the 45-degreee line, because it is at a 45-degree angle), the percentage of the population has the same percentage of the income. If everyone earned the same thing, then 10% of the population would earn 10% of the income and 40% of the population would earn 40% of the income. Because the bottom 20% of the population earned only 4.2% of the income in 1997, that point of the Lorenz curve will not be on the 45-degree line, and is shown on the curved blue line below the diagonal. Notice, however, that the next point on the curved line has the coordinates showing that 14.1 percent of income was earned by 40 percent of families. That is found by adding the 4.2 of the bottom fifth and the 9.9 of the second fifth (4.2 + 9.9 = 14.1). Similarly, the 29.8 of income at 60 percent of the families is found by adding 4.2 + 9.9 + 15.7 = 29.8. Unlike other graphs, you must cumulate the percents before plotting them on the Lorenz curve! The further the Lorenz curve is from the 45-degree line, the more unequal the income distribution. The measure for how far the Lorenz curve is from the 45-degree line is called the Gini coefficient. The Gini coefficient is the area between the Lorenz curve and the 45-degree line, divided by the whole area under the 45-degree line. A perfectly equal distribution of income will have a Lorenz curve equal to the 45-degree line, so the Gini coefficient will be zero. A perfectly unequal income distribution is when one person has 100% of the wealth; thus, the Lorenz curve is the horizontal axis until the last person is reached, and the Gini coefficient is 1. To better understand the Lorenz curve, try the following Active Graph exercise:
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