Lorenz Curve

Definition

A graph that plots the cumulative share of total income (or wealth) on the vertical axis against the cumulative share of the population, ranked from poorest to richest, on the horizontal axis; it visualises how equally income is distributed.

Key points

• The 45-degree diagonal is the line of perfect equality, where each percentage of the population earns the same percentage of income.
• The actual Lorenz curve sags below this diagonal; the further it bows away, the greater the inequality.
• The concept gini coefficient is derived from it as the ratio of the area between the curve and the diagonal to the total area under the diagonal.
• It was developed by the American economist Max O. Lorenz in 1905.
• It is a graphical tool for inequality; it pairs with summary indices for inclusive-growth analysis.

Why it matters for CAPF

The diagonal as the line of equality, the bowing below it as inequality, and the link to the Gini coefficient are testable static facts.

Common confusion

The Lorenz curve is the graph; the Gini coefficient is the single number derived from it; greater bowing away from the diagonal means more inequality, not less.

Parent note

poverty unemployment and inclusive growth