What a Lorenz curve measures

A Lorenz curve plots the cumulative share of income against the cumulative share of households, ranked from poorest to richest. If income were perfectly equal, the bottom 20 percent of households would earn 20 percent of income, the bottom 40 percent would earn 40 percent, and so on, which gives a straight 45 degree line. The more the actual curve sags below that line, the more unequal the distribution.

So a Lorenz curve is a tool for judging how equally income is shared, which is choice D. The Gini coefficient is built from the same picture.

Each choice

• A. Efficiency is about using resources to make the most of what people want. A Lorenz curve says nothing about how much is produced, only how income is divided.
• B. Comparative advantage and the terms of trade are measured with opportunity costs between countries, not with an income distribution.
• C. Specialization and growth are about how much an economy produces over time. A Lorenz curve shows how the income that exists is split, not how fast it grows.
• D (correct). The gap between the Lorenz curve and the line of perfect equality measures how unequally income is distributed.
• E. Market prices and quantities come from supply and demand. A Lorenz curve has income shares on both axes, not prices or quantities.