Specify the functional form of ‘Gini Coefficient’ with its underlying rationale. Outline how it is useful to measure income and consumption inequalities

Cowell says that the Gini coefficient is useful, particularly because it allows negative values for income and wealth, unlike some other measures of inequality. (If some amount of the population has negative wealth (owes money), the Lorenz curve will dip below the x-axis.) But the Gini coefficient also has limitations. For one, it takes all the data from the Lorenz curve and converts it to a single number. Two different income distributions can have the same Gini coefficient, and a lot of information is lost in the conversion to a graph. Cowell asks, "Why not just look at the Lorenz curve?"

In addition, the Gini coefficient cannot tell that person X is a 24-year-old medical student who has negative income because of student loans, whereas person Y, who has the same amount of negative income, is unemployed and without job prospects. It samples people at random points of their lives, which means that it can't separate those whose financial futures are reasonably secure from those who do not have prospects. Its results are also sensitive to outliers—a few very wealthy or very poor individuals can change the statistic significantly, even in a large sample.

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