One of the disadvantages of calculating economic growth as a value of GDP per capita is the fact that the indicator does not take economic inequality into account.
As mentioned in the previous article, if in 1 village there are 1,000 people earning 100,000,000 IDR per year and 9,000 people earning 24,000,000 per year, the per capita income of the village will still be 31.6 million. This would be a problem in itself considering the gap between 100 million and 24 million per year is quite distant.
in economics Such income inequality is analyzed using the Gini index. What is the Gini Index? and how to calculate Check out the discussion below:
Definition of Gini Index
The Gini Index is an economic indicator that measures income inequality among people in a country. Another name for this indicator is the Gini coefficient or the Gini ratio. This indicator was first introduced by the Italian statistician Corrado Gini in 1912.
The Gini Index ranges from 0-1. An area scores 0 if its population has an equitable income distribution. On the other hand, if an area scores 1, it means that 1 person in that area controls the source of income. got all
Although income inequality is measured But it should be remembered that this indicator does not measure overall wealth inequality. This is due to the fact that welfare indicators are quite difficult to calculate compared to income.
The Gini ratio between one country and another can be the same regardless of the country’s per capita income. For example, the Gini ratio for the Netherlands and Denmark in 2016 was 28.2% (World Bank). will differ up to 10,000 US dollars
Gini Index Formula
Mathematically, the Gini Index can be calculated using the following formula:
Xi and Xj : The value of each person’s income
ligament : number of observations
X bar : Average income.
using the Lorentz curve
Another method is to calculate the arena difference in a Lorenz curve or the Lorenz curve. The Lorenz Curve is a curve that describes the combination of an individual’s income point with the total population. Here is the picture:
To calculate the Gini ratio using this method, the formula is:
G = g//g + b)
Alias The Gini Index is equal to the area A divided by the total area of the triangle under the equilibrium line.
To use this method You must follow these steps:
- Gather information on income and percentage of the population.For example, your village consists of 1,000 households. Of those 1,000, 200 have total income. 1,000,000,000 IDR per month and 500 of them earn 750,000,000 IDR per month, the rest earn 600,000,000 Rp per month, so total income of your villagers is IDR 2,350,000,000 per month.
- Know how the percentage of population compares to the percentage of income.In the example above, for example, 20% of the population (200/1000) controls 42% of total income (1 billion divided by 2.35 billion), 50% of the population controls 32% of income, and 30% of the population controls 26% of income
- Create columns in Excel with details: Column A is Percentage of Income, Column B is Percentage of Population, and Column C is Percentage of Wealthy Population. with the highest ranked being the most disadvantaged, and column D is the score. For example, you filled in columns A1 and B1 with 26% of income (A) controlled by 30% of the population (B), so in column C you would fill in 70% because 70% of the population owns more wealth.
- The score column is filled with the results of the Gini index calculation for each income group.. The formula is:
Score = Column A* (Column B + 2 * Column C)
For example, 0.26*(0.30 +2*0.70) = 0.442.
- Include the total score of all income groups.. In the example above The 2nd and 3rd score columns are filled with 0.288 and 0.1 respectively, for a total of 0.83. sum.
- The Gini ratio is obtained from the formula 1 sum.This means that the income inequality in your village is 0.17 = 1-0.83.
Interpreting Gini Coefficient Numbers
Simply put, if the Gini coefficient is closer to 1, the income distribution in that country becomes even more unequal. Because this means that a smaller population controls an ever-increasing portion of national income. If represented by the Lorentz curve The curve will be steeper. (near the horizontal axis)
This indicator is useful in determining whether economic growth and development contribute to a more equitable distribution of national income. can only get high But it should also support the majority of the middle-income and the poor.
Indonesia Gini Coefficient
According to the World Bank The level of inequality in Indonesia in 2021 will reach 37.9. This value is lower than the Gini ratio published by Central Statistical Office In 2021, at that time, BPS recorded levels of inequality in Indonesia ranging from 0.39 to 0.40.
The latest data from BPS indicates that in the first half of 2022, the level of inequality in Indonesia reached 0.403. This value is likely to be relatively high compared to the previous Gini ratio of this country. This means that the distribution of national income in Indonesia is uneven.
In the report, BPS also listed West Sulawesi and Yogyakarta as the provinces with the most unequal economies, with scores of 0.448 and 0.446 respectively. North Kalimantan, Maluku, Papua and West Papua were the provinces with the most uniform income distribution with a Gini ratio below 0.3.
Gini Index Restrictions
While it is a very useful indicator for estimating economic inequality, the Gini ratio has its drawbacks, including:
- still use gross domestic product (GDP) as a basis for the calculation which means To calculate the Gini ratio You do not count unrecorded economic activity in the data. This may be because these activities are not official. Or because these activities actually happen on the black market?
- The Gini Index does not represent overall welfare.Simply put, it’s the Gini ratio for a given area. It can be low because people are all rich or all poor. Therefore, this indicator cannot be used as the only indicator to measure wealth.
- Differences in income distribution may result in the same Gini ratio.For example, Countries A and B have a combined income distribution score of 77% (total in subchapter above). In fact, 50% of Country A’s wealth is controlled by 15% of the population, while 35%. of country B’s wealth is controlled by 20% of the population. Usually this problem is solved by plotting the income distribution using the Lorentz curve.
in macroeconomicsThe issue of economic inequality is important. This is because, of course, it is useless if the state has ambitions to increase economic growth. But in reality this economic growth is only a few people.
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