Studyledge

Government Intervention and Inequality: Question 1

Syllabus 3.3

Multiple choice AS 1 mark

Economists use the Gini coefficient as one way of measuring how evenly income or wealth is shared out across a population. Its value always lies between 0 and 1 (it can also be expressed as a percentage between 0% and 100%).

Which of the following statements about the Gini coefficient is correct?

Choose an answer to check it, then compare with the worked solution below.
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Worked solution

Step 1: Recall what the Gini coefficient measures

The Gini coefficient summarises how evenly (or unevenly) income or wealth is distributed across all households in a population, based on comparing the actual distribution with a hypothetical situation of perfect equality. By convention:

  • A value of 0 means every household has an identical share, perfect equality.
  • A value of 1 means a single household holds the entire amount and everyone else has none, perfect inequality.
  • Values in between rise as the distribution becomes more unequal.

Step 2: Check option B

Option B states this correctly: 0 is perfect equality and 1 is perfect inequality. This matches the definition above.

Step 3: Rule out A, C and D

  • Option A reverses the scale, it swaps the meaning of 0 and 1 around, describing 0 as inequality and 1 as equality, the opposite of the true definition.
  • Option C confuses a relative measure with an absolute one. A rising Gini coefficient means income has become more unevenly shared out relative to the total, but this can happen even while every household’s income is rising in absolute terms, provided richer households’ incomes are rising faster than poorer households’ incomes.
  • Option D describes the circular flow of income (the flow of income between households, firms, government and the international economy), a completely different macroeconomic model. The Gini coefficient instead describes the shape of the income or wealth distribution at a point in time, not a flow between sectors of the economy.

Final answer

Option B. A Gini coefficient of 0 means perfect equality and a coefficient of 1 means perfect inequality (one household receiving everything); A reverses this scale, and C and D describe unrelated ideas.