This document discusses principles and measures of economic inequality. It introduces four principles of inequality: the anonymity principle, population principle, relative income principle, and Dalton principle. It then explains the Lorenz curve, a diagram used to depict income distribution. Several measures of inequality are outlined, including the range, Kuznets ratios, mean absolute deviation, coefficient of variation, and Gini coefficient. The Gini coefficient is noted as one of the most widely used measures in empirical work as it satisfies all four principles of inequality.

1. PRINCIPLES AND
MEASURES OF
INEQUALITY
Janisha Dubey
Varadha Krishna
Aparna.S

2. INTRODUCTION
Economic inequality is the unequal distribution of
income and opportunity between different
groups in society. It is a concern in almost all
countries around the world and often people are
trapped in poverty with little chance to climb up
the social ladder.
The process of wealth concentration arguably
makes economic inequality a vicious cycle

3. PRINCIPLES OF
INEQUALITY
ANONYMITY PRINCIPLE
POPULATION PRINCIPLE
RELATIVE INCOME PRINCIPLE
DALTON PRINCIPLE

4. ANONYMITY
PRINCIPLE
• States that it does not matter who earns the income
• Individual A earning Y1 and individual B earning Y2 should
be viewed as identical to one in which A earning Y2 and B
earning Y1.
• We care about the ordering but not the identities of each
earner
• We can always arrange our income distribution so that
Y1 ≤ Y2≤ ……...≤ Yn
• That is, arranging individuals in such a way that they are
ranked from poorest to richest

5. POPULATION
PRINCIPLE
• States that cloning the entire population should not alter
inequality
• On comparing an income distribution over n people and
another population of 2n people with the same income
pattern repeated twice there should be no difference in
inequality among the two income distribution
• It states that it doesn’t matter how large the population is
we need to focus on the proportions of population that
earn different levels of income

6. RELATIVE
INCOME
PRINCIPLE
• States that only the relative incomes should matter and the
absolute levels of these incomes should not
• Thus, if we transform one distribution by multiplying a
positive constant (example: Y1 = αY0 ) then inequality
should be the same for the two distributions.

7. DALTON
PRINCIPLE
• States that if one income distribution can be achieved from
another by constructing a sequence of regressive transfer,
the former distribution must be deemed more unequal
than the latter
• In simpler words, the society will be better off when a unit
of income is transferred from a richer individual to a poorer
individual.

8. LORENZ CURVE
• Simplest diagrammatic way to depict the distribution of income
• Horizontal axis: cumulative percentage of population in increasing order
• Vertical axis: percentage of national income accruing to any particular
fraction of the population
• Diagonal line(45°): line of perfect equality(Y=X)

9. LORENZ CURVE
• The overall distance between the 45° line and Lorenz curve represents the amount
of inequality
• With increase in inequality Lorenz curve starts to fall below the diagonal in a loop that is
always bowed out to the right of the diagram.
• Slope of the curve at any point is simply the contribution of the person at the point to
the cumulative share of national income.
• Ordered from poorest to richest the 'marginal contribution' can never fall. That is the
Lorenz curve can never get flatter as we move from left to right.

10. MEASURES OF INEQUALITY

11. MEASURES
OF
INEQUALITY
THE RANGE
THE KUZNETS RATIOS
THE MEAN ABSOLUTE DEVIATION
THE COEFFICIENT OF VARIATION
THE GINI COEFFICENT

12. THE RANGE
• It is given by the difference in the incomes of the richest
and the poorest individual, divided by the mean
• It is a crude measure, it is also useful

13. THE KUZNETS
RATIOS
• These ratios were introduced by Simon Kuznets
• Refers to the ratio of the shares of income of the richest x%
to the poorest y% where x & y are numbers such as
10,20,30 etc
• Crude measures, it focuses on ends of distribution

14. THE MEAN
ABSOLUTE
DEVIATION
• Inequality is proportional to distance from the mean income.
• Drawback: it is often insensitive to Dalton principle

15. COEFFICIENT
OF VARIATION
• Standard measure of relative dispersion
• It satisfies all four principles

16. GINI
COEFFICIENT
• Widely used in empirical work
• Takes the difference between all pairs of incomes and
simply totals the absolute differences
• It satisfies all four principles
• Gini coefficient is the ratio of the area between the Lorenz
curve and the 45° line to the area of the triangle below the
45° line.
• G = A/(A+B) (from the above figure)

17. THANK YOU