The closer the Lorenz Curve is to the diagonal line of perfect equality, the more evenly income is distributed. The farther the curve moves away from this line, the greater the level of inequality.
The Lorenz Curve is also closely related to the Gini coefficient or Gini ratio, a widely used numerical measure of economic inequality.
Key Takeaways
- The Lorenz Curve visually represents income or wealth distribution.
- The horizontal axis represents the cumulative percentage of the population.
- The vertical axis represents the cumulative percentage of income or wealth.
- The 45-degree diagonal represents perfect equality.
- A Lorenz Curve farther from the diagonal indicates greater inequality.
- The curve is closely related to the Gini coefficient.
What Is the Lorenz Curve?
The Lorenz Curve is a graphical method for showing how income, wealth, expenditure, or another economic variable is distributed across a population.
To construct the curve, individuals or households are first ranked from the lowest to the highest income. Their cumulative share of the population is then compared with their cumulative share of total income.
For example, suppose the bottom 40% of the population receives only 15% of total income. The Lorenz Curve would contain a point showing that 40% of the population accounts for 15% of income.
This type of analysis is part of a broader data-driven approach to economics. To understand how economists use factual data to describe economic conditions, you can also read Descriptive Economics and Its Examples. The page is currently active on Mobee EN.
Main Components of the Lorenz Curve
There are four main components to understand when reading a Lorenz Curve.
1. X-Axis: Cumulative Percentage of the Population
The horizontal axis shows the cumulative share of the population, ordered from the lowest-income group to the highest-income group.
The values range from 0% to 100%.
2. Y-Axis: Cumulative Percentage of Income
The vertical axis shows the cumulative share of total income received by that portion of the population.
It also ranges from 0% to 100%.
3. Line of Perfect Equality
The 45-degree diagonal represents a hypothetical situation in which income is distributed equally.
For example:
- 20% of the population receives 20% of income.
- 50% of the population receives 50% of income.
- 80% of the population receives 80% of income.
Under perfect equality, the Lorenz Curve would lie directly on this diagonal line.
4. Lorenz Curve
The Lorenz Curve represents the actual distribution observed in the data.
In a typical income distribution, the curve lies below the line of perfect equality. The greater the distance between the two lines, the greater the concentration of income among higher-income groups.
How to Read a Lorenz Curve
Reading a Lorenz Curve is relatively straightforward.
Suppose the graph shows that:
The bottom 50% of the population receives only 25% of total income.
This means that half of the population receives one-quarter of total income, while the remaining half receives the other 75%.
If another economy shows that its bottom 50% receives 40% of total income, the second economy has a more equal distribution because its Lorenz Curve would be closer to the line of perfect equality.
The basic interpretation is:
Curve closer to the diagonal → lower inequality
Curve farther from the diagonal → higher inequality
However, comparing two distributions becomes more complicated when their Lorenz Curves intersect. In this situation, a numerical indicator such as the Gini coefficient can provide additional context.
Lorenz Curve Formula
There is no single equation required to construct every empirical Lorenz Curve. In practice, the curve is built from the cumulative share of the population and cumulative share of income.
If there are n individuals or households ranked from the lowest to the highest income, the cumulative population share can be expressed as:
Xi = i / n
The cumulative income share can be expressed as:
Yi = cumulative income up to individual i / total income
Each (Xi, Yi) pair is then plotted on a graph.
Connecting these points produces the Lorenz Curve.
How to Calculate a Lorenz Curve
A simple Lorenz Curve can be calculated in several steps:
- Rank income from lowest to highest.
- Calculate total income.
- Calculate each group’s share of the total population.
- Calculate cumulative income.
- Convert cumulative income into a percentage of total income.
- Plot cumulative population on the X-axis.
- Plot cumulative income on the Y-axis.
- Compare the resulting curve with the line of perfect equality.
Lorenz Curve Calculation Example
Consider five households with the following monthly incomes:
Total household income is Rp20 million.
The Lorenz Curve points are therefore:
(0%, 0%) → (20%, 5%) → (40%, 15%) → (60%, 30%) → (80%, 50%) → (100%, 100%)
In this example, the bottom 80% of households receive only 50% of total income, while the top 20% receive the remaining 50%.
Plotting these points makes the level of inequality much easier to visualize.
Lorenz Curve vs. Gini Coefficient
The Lorenz Curve and Gini coefficient describe the same general issue—economic inequality—but present it differently.
The Lorenz Curve provides a visual representation, while the Gini coefficient summarizes inequality into a single numerical value.
In simplified geometric form:
Gini = A / (A + B)
Where:
- A = area between the line of perfect equality and the Lorenz Curve.
- A + B = total area beneath the line of perfect equality.
The coefficient generally ranges from:
- 0 = perfect equality
- 1 = maximum inequality
Because the Lorenz Curve reveals the shape of a distribution rather than just one summary number, it can provide additional information that the Gini coefficient alone may not show.
Lorenz Curve and Indonesia’s Gini Ratio
The Lorenz Curve is not merely a theoretical concept. Inequality indicators are regularly used to evaluate real economic conditions.
BPS-Statistics Indonesia reported that Indonesia's Gini Ratio was 0.368 in March 2026, up from 0.363 in September 2025 but below 0.375 in March 2025.
The same BPS release reported:
- Urban Gini Ratio: 0.387
- Rural Gini Ratio: 0.296
- Expenditure share of the bottom 40%: 19.22%
These figures show how inequality analysis provides information that cannot be obtained simply by looking at the overall size of an economy.
For comparison, Gross Domestic Product (GDP) measures the value of economic activity produced within an economy, while the Lorenz Curve and Gini Ratio help explain how economic resources are distributed across the population. The linked English GDP article is active on Mobee.
You can also learn more about the calculation side through Mobee's guide to the GDP formula and how to calculate GDP.
Functions of the Lorenz Curve
The Lorenz Curve can be useful for several types of economic analysis.
Comparing Inequality
Economists can compare income or wealth distributions across countries, regions, population groups, or different periods.
Evaluating Economic Policies
Governments can compare distributions before and after tax changes, subsidies, social assistance, or redistribution policies.
Identifying Economic Concentration
The curve can illustrate whether a large share of income or wealth is concentrated among a relatively small part of the population.
Complementing Other Economic Indicators
Inequality should generally be analyzed together with broader indicators such as GDP, unemployment, inflation, and price changes.
For additional context, see Mobee's guide to the Price Index: Definition, Formula, and How to Calculate It.
Advantages and Limitations of the Lorenz Curve
One major advantage of the Lorenz Curve is its visual simplicity. It allows readers to quickly understand how far an observed distribution is from perfect equality.
It can also make it easier to compare distributions between populations or periods.
However, the Lorenz Curve has several limitations.
First, it measures distribution, but does not explain why inequality exists.
Second, the results depend on the type of data being analyzed. Income, consumption, expenditure, and wealth may show different levels of inequality.
Third, comparisons across countries should be interpreted carefully because statistical methodologies and definitions may differ.
For this reason, the Lorenz Curve and Gini coefficient are more useful when considered alongside other economic indicators.
How Does the Lorenz Curve Relate to Investment Analysis?
The Lorenz Curve is not a direct indicator for predicting stock, gold, or cryptocurrency prices.
However, inequality is part of a country's broader macroeconomic environment. It can be related to consumption patterns, taxation, government transfers, fiscal policy, and political or economic policy decisions.
Investors performing fundamental analysis therefore often consider several macroeconomic indicators together, including GDP growth, inflation, interest rates, employment conditions, and income distribution.
For a broader explanation of how macroeconomic conditions can influence digital assets, read How Does Macroeconomics Affect Cryptocurrency Prices?.
Conclusion
The Lorenz Curve is a graph used to illustrate how evenly or unevenly income, wealth, or another economic variable is distributed across a population.
The X-axis represents the cumulative percentage of the population, while the Y-axis represents the cumulative percentage of income or wealth.
The diagonal line represents perfect equality. The farther the Lorenz Curve moves away from this line, the greater the level of inequality.
The curve is also closely connected to the Gini coefficient, which converts the degree of inequality into a numerical measure.
Because it reveals information that cannot be seen from indicators such as average income or total GDP alone, the Lorenz Curve remains a useful tool for understanding economic distribution.
FAQ About the Lorenz Curve
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