Lecture Note: Concept of Inequality and Its Measurements
1. Introduction to Inequality
Inequality refers to the state of being unequal or uneven in terms of resources,
opportunities, and privileges.
It exists in different dimensions: economic, social, political, and gender-based
inequalities.
The focus in this lecture is on economic inequality, primarily income distribution.
2. Types of Economic Inequality
1. Functional/Factor Share Distribution of Income
o Examines the share of total national income received by factors of production
(land, labor, and capital).
o Example: Labor income vs. rent, interest, and profit.
2. Personal/Size Distribution of Income
o Deals with how income is distributed among individuals or households.
o Commonly measured using quintiles or deciles (e.g., bottom 40% vs. top 20%).
3. Measuring Income Inequality
Quintile/Decile Analysis: Population is divided into equal-sized groups, and their
income shares are analyzed.
Kuznets Ratio: Compares the share of total income received by the richest 20% to that
received by the poorest 40%.
Lorenz Curve: A graphical representation showing cumulative income distribution.
o If income is perfectly distributed, the curve is a straight diagonal line.
o The more bowed-out the curve, the greater the inequality.
o To construct a Lorenz Curve, follow these steps:
1. Rank the population from lowest to highest income.
2. Calculate cumulative income shares.
3. Plot cumulative percentage of population (X-axis) against cumulative
income percentage (Y-axis).
4. Compare the curve with the line of equality (a 45-degree diagonal line).
5. The farther the Lorenz curve is from the diagonal, the greater the
inequality.
Gini Coefficient: A numerical measure of inequality derived from the Lorenz curve.
o Definition: The Gini coefficient quantifies income inequality by measuring the
area between the Lorenz curve and the line of perfect equality.
o Formula: , where:
is the area between the Lorenz curve and the line of equality.
is the area under the Lorenz curve.
o Interpretation:
Value of 0: Perfect equality (everyone has the same income).
Value of 1: Perfect inequality (one person has all income, others have
none).
o Example: If Country A has a Gini coefficient of 0.28 and Country B has 0.60,
Country A is more equal than Country B.
4. Global and Regional Poverty Trends
Poverty levels have decreased globally, but challenges remain, especially in Sub-
Saharan Africa.
The UN’s Sustainable Development Goals (SDGs) aim to eradicate poverty.
World Bank Reports highlight that while some countries (e.g., China) have reduced
poverty, many African nations still struggle.
5. Women and Poverty
Women disproportionately experience poverty due to:
o Lower income levels.
o Limited control over financial resources.
o Less access to education and employment.
Female-headed households tend to be poorer than male-headed ones.
Solutions include increasing women's access to education, healthcare, and financial
independence.
6. Poverty and Inequality in Ethiopia
Ethiopia’s poverty rate declined from 59% in 1992 to 29.5% in 2011.
Rural poverty is higher than urban poverty due to dependence on rain-fed agriculture.
Gini Coefficient measures show inequality remains a challenge.
Government policies include Poverty Reduction Strategy Papers (PRSPs) and
Household Income Surveys.
7. Role of Indigenous Knowledge in Reducing Poverty
Traditional financial institutions help communities cope with poverty:
o Idir: Burial society providing social and financial support.
o Iqub: Rotating savings and credit association.
o Debo: Communal labor-sharing system.
Cottage industries (weaving, pottery, blacksmithing) provide employment and
income.
Modern cooperatives (e.g., coffee unions) promote sustainable livelihoods.
Discussion Questions:
1. How is economic inequality measured?
2. What are the benefits of using the Gini coefficient and the Lorenz curve?
3. How do indigenous financial institutions help in poverty reduction?
4. Discuss why female-headed households tend to face higher poverty rates.
5. What policies can Ethiopia implement to further reduce poverty and inequality?