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This analytical tool illustrates how Lorenz Curves can be used to identify the best income distribution on social welfare grounds, within a set of alternative income distributions generated by different policy options. After highlighting some drawbacks of using specific functional forms of the Social Welfare Function (SWF) to infer welfare judgments, the rationale for using Lorenz Curves to rank income distributions is provided in a step-by-step procedure and is illustrated with some simple numerical examples. This module also points out the limitations of Lorenz dominance and highlights how, in some circumstances, it is necessary to use Generalised Lorenz (GL) Curves. Generalised [...]

This analytical tool explains how to build Lorenz Curves for income distributions and discusses their use for inequality measurement. A short conceptual background, a step-by-step procedure and a simple numerical example illustrate how to calculate and draw Lorenz Curves. A discussion on the use of Lorenz Curves to represent inequality is also provided. It highlights that the Lorenz Curve is one of the most used ways of representing income distributions in empirical works thanks to its immediate comparability with a “natural” benchmark, the Equidistribution line, representing the most egalitarian distribution. The concepts of Lorenz dominance and intersection of Lorenz Curves [...]