How is income inequality measured?

Income inequality is typically measured using various statistical indicators and measures. Some commonly used measures of income inequality include:

1. Gini coefficient: The Gini coefficient is a widely used measure of income inequality. It ranges from 0 to 1, where 0 represents perfect equality (all individuals have the same income) and 1 represents maximum inequality (one individual has all the income). The Gini coefficient is calculated by plotting the cumulative share of income against the cumulative share of the population and measuring the area between the line of perfect equality and the Lorenz curve.

2. Theil index: The Theil index is another measure of income inequality that takes into account both within-group and between-group inequality. It measures the average difference between each individual's income and the mean income, weighted by the individual's share of total income. The Theil index ranges from 0 to infinity, where 0 represents perfect equality and higher values indicate higher inequality.

3. Palma ratio: The Palma ratio is a measure of income inequality that compares the share of income held by the top 10% of the population with the share of income held by the bottom 40% of the population. It provides a simple and intuitive measure of income inequality, focusing on the extremes of the income distribution.

4. Income quintiles: Income quintiles divide the population into five equal groups based on their income levels. This measure allows for a comparison of the income share held by each quintile, providing insights into the distribution of income across different segments of the population.

5. Relative poverty rate: The relative poverty rate measures the proportion of individuals or households with income below a certain threshold, typically set at a percentage of the median income. This measure focuses on the proportion of the population living in poverty relative to the overall income distribution.

It is important to note that each measure has its limitations and may provide different perspectives on income inequality. Therefore, it is often recommended to use multiple measures to gain a comprehensive understanding of income inequality in a given society.