 # The Lorenz Curve

The Lorenz Curve provides a method of displaying the distribution of income or wealth within an economy. The Lorenz Curve was developed by Max O. Lorenz in 1905 as a way of representing wealth distribution.

• The Lorenz Curve displays the cumulative share of income from various sections of the population.
• If perfect equality were to exist (if everyone had the same salary), the poorest 20% of the population would then gain 20% of the total income. Meanwhile, the poorest 60% of the population would receive 60% of the income.

## Diagram of The Lorenz Curve

In the Lorenz Curve above, the poorest 20% of households only have 5% of the total income of the nation. Meanwhile, the poorest 90% holds 55% of the total income, leaving the richest 10% with 45% of the total income.

## A Shift in the Lorenz Curve

In the example above, a reduction in inequality has taken place. You can see that the Lorenz Curve has moved and is now closer to the line of equality. Now, the poorest 20% have 9% of the total income, and the richest 10% receive 25% of the total income.

## The Lorenz Curve and the Gini Coefficient

The Gini Coefficient is another measure of inequality, and you can use the Lorenz Curve to calculate it. Area A/A+B is the Gini Coefficient.

Area A becomes smaller the closer the Lorenz Curve is to the line of equality. The Gini Coefficient will be low in this situation. But if there’s a high degree of inequality, area A will take up a larger percentage of the total area.

When the Gini Coefficient rises, it shows a rise in inequality. It shows that the Lorenz Curve is further from the line of equality.

## The Lorenz Curve and Wealth

In the Lorenz Curve, you can see the cumulative wealth of each of the wealth deciles. For instance, it shows that the lowest 38% of people have zero property wealth. The top 10%, however, own almost 50% of the property wealth.

When you look at financial wealth, the inequality is even greater. 60% of the population is in debt and has negative wealth. At the same time, the top 10% has 80% of the nation’s financial wealth.

## The Gini Coefficient in the UK

Here you can see that the UK has experienced a rise in inequality since 1979. This is especially apparent during the 1980s.

## The Original Lorenz Curve

The very first Lorenz Curve had the percentage of population and percentage of total income on opposite axes.