Sunday, November 26, 2006

Is Gini Index an Important Measure in Industrialized Countries?

There is always a constant and ongoing criticism that income inequality is a bad thing from the left. But is this necessarily bad? If a nation has a strong safety net and a high median income level above the $13,000 per capita GDP needed for economic well being, then what is wrong with people striving for whatever makes them happy including wealth accumulation? As we can see most of the richest people on this planet have already been shamed enough into giving their wealth away.

One of the tools for measuring inequality of a distribution is the Gini coefficient. Without going into the meaning and significance I wanted to present a hypothetical Island called Gates Island. It will have exactly 10 people on it with one being the original Bill Gates. The formula I will use to measure the Gini Coefficient on Gate Island is:

The top one more specifically. The people are ranked from 1 to 10 based on yearly income (i). I gave Bill Gates an income of 4 billion. This may be excessive but considering he has 53 billion in assets a modest return would net him 4 billion. And without further ado:

As it clearly shows this is a pretty high number, but let us look at all the other nations of the world to compare at: List of countries by income equality. So Gates Island is much closer to 1 than any other nation of the world and thus has a higher inequality index. The closest is Namibia at 74.3 vs. 89.9 Gini Index (which is the Gini Coefficient times 100).

So what does this mean? Should we be sorry about those other 9 people that are "poor" or should we be glad that Bill Gates can pay all the expenses of the Government? Obviously, those that live on Gates Island are better off than 99% of the population of the world, even the poorest at $100,000 per year.

Given my choices, I think I would like to live in a place that had a medium income of $550,000/year compared to Rwanda at: Per capita $1,300 (160th) but has a low Gini Index of 28.9GI.

List of countries by income equality
Gini coefficient of inequality
Income inequality metrics
World Atlas of Income Inequality (gini coefficients)
Gini-Curve makes me think of Laffer curve!?
Inequality, Growth and Poverty in the Era of Liberalization and Globalization (PDF)