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Faculty of Economics

The Washington Post explains the 'Palma ratio', a new way of measuring income inequality.

The Washington Post explains why many development experts have come to prefer something now called the Palma ratio as a measurement of inequality. The ratio is named after José Gabriel Palma, who demonstrated (Cambridge Working Paper 1111, 1437, 1627, 1999 and 19100) that the income share of the 50% of the population corresponding to the middle and upper-middles groups (deciles 5 to 9 of a country's income distribution) tend to always get a similar share of income - approximately 50% of the total. Therefore, all the huge disparities across the world in terms of income distribution is almost exclusively the result of what happens in the other 50% of the population, the top 10% and the bottom 40%. As a result, Palma proposes to use the ratio of the share of income appropriated by the top 10% over that of the bottom 40% as a more meaningful and transparent indicator of inequality than the Gini. At the bottom of the article there is an animation that explains this ratio.