Atkinson index

Intro

3 Key Takeaways

• The Atkinson index is a measure of income inequality that focuses on social welfare.
• It assigns a higher weight to inequality at the lower end of the income distribution.
• The index is used by policymakers and economists to assess the impact of economic policies on income inequality.

What is the Atkinson Index?

The Atkinson index, developed by Anthony Barnes Atkinson in 1970, is a measure of income inequality that ranges from 0 to 1. A value of 0 indicates perfect equality, where everyone has the same income, while a value of 1 represents maximum inequality, where one person has all the income. The index is based on a social welfare function that exhibits diminishing marginal utility of income, meaning that an additional pound of income is valued more by a poorer individual than by a richer one.

Importance of the Atkinson Index

• Social Welfare Focus: The Atkinson index goes beyond simply measuring the dispersion of income and considers the social welfare implications of inequality. This makes it a valuable tool for policymakers concerned with the impact of economic policies on the well-being of different income groups.
• Inequality Aversion: The index allows for different degrees of inequality aversion, reflecting the idea that society may be more concerned about inequality at the lower end of the income distribution. This flexibility makes it a useful tool for analyzing the distributional effects of various policy options.
• Comparability: The Atkinson index can be used to compare income inequality across different countries or regions, as well as over time. This allows for the identification of trends and patterns in income inequality and the evaluation of the effectiveness of policies aimed at reducing it.

How the Atkinson Index Works

The Atkinson index is calculated using a formula that takes into account the incomes of all individuals in a population and a parameter that reflects the degree of inequality aversion. The higher the inequality aversion parameter, the greater the weight assigned to inequality at the lower end of the income distribution. The index can be calculated for different levels of inequality aversion, providing a range of values that can be used to assess the sensitivity of the results to different ethical judgments about inequality.

Real-World Applications

The Atkinson index is widely used by policymakers, economists, and researchers to assess the impact of economic policies on income inequality. It has been used to analyze the effects of tax reforms, changes in social welfare programs, and globalization on the distribution of income.

The index is also used to compare income inequality across different countries and to track changes in inequality over time. By providing a comprehensive and nuanced picture of income inequality, the Atkinson index can inform policy debates and help policymakers design interventions that promote a more equitable distribution of income.