Lorenz Curve free essay sample

In the diagram above, the ratio of the area between the diagonal and the Lorenz curve, to the total area under the diagonal is known as the Gini Coefficient. However, despite its simplicity there are numerous limitations to this curve. Firstly, the Lorenz curve is based on the data relating to money income rather than disposable income. It does not take into consideration personal income taxes, social security deductions, subsidies received by the poor families etc. Moreover, the data are converted to a per capita basis to adjust for differences in average family size within each quantile (5th) or decile (10th) group of the population. As a consequence, smaller families may sometimes be shown better off than large ones with greater incomes. Furthermore, the measurement of income inequality with a Lorenz curve shows income distribution only at a given time and therefore does not take into consideration lifetime income. For instance, the income of a sports man and of a lecturer may be about the same over their lifetimes. We will write a custom essay sample on Lorenz Curve or any similar topic specifically for you Do Not WasteYour Time HIRE WRITER Only 13.90 / page But the income of the lecturer may be spread over a number of years say for 40 years whereas that of sports man may be realized in 10 years. Hence, the two incomes are likely to be highly unequal in a given year. Moreover, the construction of a Lorenz curve does not consider the ages of the persons, who receives income. The income of a young individual who enters jobs recently those in mid-career and of old people who have retired are not the same. But the Lorenz curve does not distinguish incomes by ages and reflects inequalities across all ages. It is therefore not correct to group the incomes of the people belonging to different age groups for measuring income inequality. Besides, the Lorenz Curve or the Gini Coefficient doe not highlight the growth of income. For instance, Country A could be bridging the disparities in income gradually over the past 10 years, however their progression is not highlighted by the Lorenz curve and therefore could make it seem like the inequalities are in fact increasing with respect to other countries. Additionally, there could be problems with measurements since comparing income distributors among countries may be difficult because benefits systems differ from country to country. Further, the measurements will give different results when applied to individuals instead of households or simply, there could be difficulties in the statistics since there may be random and systematic errors in the date due to different data collection techniques by different countries. Thus, this essay highlights how despite perceptive appeal and straightforwardness there are numerous limitations to the Lorenz curve.