# inequality measured by mean over median does not satisfy an important principle of

inequality called the transfer principle, which states that inequality should decrease when

income is transferred from a rich person to a relatively poor person. Over time, if the

income distribution of people above the mean income or below the median income or

both changes, this inequality index will not change. While the U.S. Census (2004) states

that income inequality has been widening in the United States between 1990 and 2000,

inequality when measured as mean over median shows a decline in income disparity over

the period. Moreover, the latter measure is more likely to be affected by outliers than the

# Gini index. However, one apparent drawback of using Gini index is that it does not

differentiate whether income is distributed from the rich to the middle class or from

middle to the lower class, since it is only an aggregate measure.

# Constructing the Index

# The formula for calculating the Gini Index is:

^{1 / 2[}

K 1 i 1

K j i 1

1 1 | ( / ) ( / ) | ] i j K P K P

where i and j refer to the share of income the respective individuals possess. K refers to

the number of components or income shares P denotes the proportional share of the , i

income that i holds. Because the highest class interval of the income distribution is open

ended, I impute the mean value of this bin by using Hansen’s approach.

# This value is calculated as follows:

h [log( A B) log( A)] / [log( L. L

open

) log(L. L

penultimate open

)]

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