All you need to know about Lorenz Curves, Functions, and How to Calculate Them

 

Have you ever heard of the Lorenz Curve?  The curve is an unequal distribution of income and  wealth .  In a way, Lorenz is a graph that shows economic inequality in a country.  Inequality that occurs is based on the income and wealth of the community.

 The Lorenz curve is very important because it is a useful curve in the Draft State Budget or APBN.  The presentation displays the cumulative figure of income derived from the cumulative population.

 Table of Contents

 What is a Lorenz Curve?

 Elements in a Lorenz Curve

 Lorenz Curve Functions

 What Are the Disadvantages of Lorenz Curves?

 Knowing the Advantages of the Lorenz Curve

 How to Calculate a Lorenz Curve

 Inequality that Occurs in the Lorenz Curve

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 What is a Lorenz Curve?

 The Lorenz curve is a graphic presentation that describes the inequality of a system, especially the distribution of income or wealth in a region.  It is not surprising that this curve is used in the analysis of the Gini coefficient.  This curve was developed by Max Lorenz in 1905.

 The graph shown divides population percentiles on the horizontal axis by wealth or income.  Besides that, it also partitions the cumulative income or income on the vertical axis.  Finally, an X value of 45 and a Y value of 14.2 means the lowest 45% of the population controlling 14.2% of total wealth.

 Elements in a Lorenz Curve

 The elements of the Lorenz Curve include the horizontal axis or the x axis (horizontally).  This axis defines the cumulative percentage of the population.

 Another element contained in Lorenz is the vertical axis or y axis (upright).  The vertical axis defines the percentage of income received by residents.

 From the coordinate points obtained can be drawn a line in a curve.  This point is known as the evenness line.  Formed by OBA, the distribution will be said to be even if the curve is getting closer to the OA line.

 So, if the shaded area (between the OBA curve and the OA line) is wider, it means that people’s income is more unequal.

Lorenz Curve Functions

 As explained above, the function of the Lorenz Curve is to determine the level of inequality in the distribution of people’s wealth in an area.  Calculation will be done by measuring the total of wealth and its distribution in the population of society.

 Wealth distribution is said to be even if the curve is on a diagonal line.  Then, the existing data is presented graphically which is displayed as a curve.  The curve can be used by economists and statisticians to see detailed information about the distribution of wealth.

 This is because the Lorenz Curve shows in detail the variation of the wealth percentile which allows regional equity to occur.  That’s the curve function that can be applied.

 What Are the Disadvantages of Lorenz Curves?

 Since Lorenz involves adjustments between advanced functions to incomplete data sets, there is no guarantee that the resulting curve is accurate.  It is also possible that data is too expensive or requires a lot of resources.

 The goal, of course, is to collect enough points to be able to fill in all the gaps.  There is another weakness that can be found from this one-curve concept, namely the existing data may not accurately reflect the entire population.

 Therefore, Lorenz can also go wrong.  Curves may need a complete data set to fill in the entire curve data.  In addition, it takes an estimated time to be able to conclude the preparation of the curve that will be made.

 Knowing the Advantages of the Lorenz Curve

 Having flaws doesn’t mean you don’t have strengths, right?  It’s the same with this curve from Lorenz which also has a number of advantages.  One of them is an easy-to-understand visual for calculating the gap between populations.

 This curve is also used to help calculate the gini coefficient and maintain the anonymity of each individual surveyed.  The existence of a curve helps the government determine policies and calculate taxes based on income distribution.  In addition it shows changes in the curve over time.

How to Calculate a Lorenz Curve

 There are still many who don’t know how to calculate the Lorenz Curve.  After the data is collected, Lorenz will usually be installed to present the data set.

 This is because each set of information is definitely different.  Consequently, there is no formula for a single universal curve.  In addition, nonlinear equations often show the difference.

 Inequality that Occurs in the Lorenz Curve

 The first time, Lorenz was developed in 1905 by economists from the United States.  An economist from the United States named Max Lorenz.  The graph shows the total population compared to the cumulative income.

 In economics, Lorenz described inequality in the distribution of wealth or income.  This is because they are not synonymous with having a high income but a zero or negative net worth figure.  It can also be called as low income but big net worth.

 In general, Lorenz begins with empirical measurements of the distribution of income across the population based on data.  Starting from returning tax which reports income for the majority of the population.

 Graphs of Lorenz Curve data can be used together.  In this case, the variable to be used is the cumulative population.  Of course, the curve is also equipped with a straight diagonal line whose slope is 1.

 Slope 1 has a percentage of equality between distribution or distribution of wealth.  At the bottom there is a curve showing the distribution.  The area between the straight line and the curved line is known as the gini coefficient.

 The Gini coefficient is a representation of an economic inequality in an object or object being observed.  The farther the curve is from the diagonal line, the unequal distribution of wealth.  Vice versa if the curve is close to the diagonal line, then the distribution of wealth is more even.

 After seeing the meaning of the Lorenz Curve and how to calculate it, do you understand now?  If you want to calculate wealth in your own area, you can try using this curve.  So, is the income evenly distributed?

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