Glossary term
Palma Ratio
The Palma ratio is an income inequality measure that compares the income share of the top 10% with the income share of the bottom 40%.
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What Is the Palma Ratio?
The Palma ratio is an income inequality measure that compares the income share of the top 10% of a population with the income share of the bottom 40%. It is designed to focus attention on the extremes of the income distribution rather than on the middle.
The ratio is named for economist Gabriel Palma, whose work emphasized that the middle portions of many income distributions can be relatively stable, while the largest differences often appear in the shares captured by the top and bottom.
Key Takeaways
- The Palma ratio compares the top 10% income share with the bottom 40% income share.
- A higher ratio indicates more income concentration at the top relative to the bottom.
- The measure is easier to explain than some technical inequality indexes.
- It deliberately ignores much of the middle distribution.
- It is often used with, not instead of, measures such as the Gini coefficient and Theil index.
Palma Ratio Formula
The basic Palma ratio formula is:
If the top 10% receives 40% of national income and the bottom 40% receives 20%, the Palma ratio is 2.0. That means the top tenth receives twice the income share of the bottom forty percent.
How to Interpret It
A Palma ratio near 1 means the top 10% receives about the same income share as the bottom 40%. A ratio above 1 means the top decile receives a larger share. The higher the ratio, the more concentrated income is at the top relative to the bottom.
The measure is not a complete map of inequality. It does not show how income is distributed inside the top 10%, inside the bottom 40%, or across the middle 50%. Its purpose is narrower: to make the top-versus-bottom relationship visible.
Why Analysts Use It
The Palma ratio is useful because it is easy to communicate. Many inequality measures are statistically rich but hard to explain. The Palma ratio asks a direct question: how much income does the top tenth receive compared with the bottom forty percent?
That question can be relevant for public finance, consumer demand, political risk, and development strategy. If the bottom 40% has a small share of income, broad consumption growth may be weaker than headline GDP growth suggests.
Comparison With Other Measures
Measure | Focus | Useful caution |
|---|---|---|
Palma ratio | Top 10% versus bottom 40% | Ignores the middle 50% |
Gini coefficient | Overall inequality across the distribution | Can be less transparent to non-specialists |
Theil index | Entropy-based dispersion and decomposition | Requires more statistical context |
Financial Interpretation
The Palma ratio can help translate inequality into market and policy questions. A high ratio may indicate that income gains are concentrated among households with different spending, saving, and investment behavior than lower-income households. That can affect consumer demand, political pressure, tax debates, and social-policy priorities.
For business analysis, the measure can help explain why aggregate income growth may not translate into broad-based customer demand. For public-policy analysis, it can clarify whether income growth is reaching the bottom of the distribution or accumulating mainly at the top.
Example
Consider two countries with similar average income. In Country A, the top 10% receives 30% of income and the bottom 40% receives 30%, producing a Palma ratio of 1.0. In Country B, the top 10% receives 45% and the bottom 40% receives 15%, producing a Palma ratio of 3.0.
Both countries may report similar average income, but the second has much more income concentrated at the top relative to the bottom. That can change the way growth shows up in household spending, credit demand, tax politics, and social mobility.
The Bottom Line
The Palma ratio measures income inequality by comparing the top 10% income share with the bottom 40% income share. It is not a full distributional model, but it is a clear way to show whether income is concentrated at the top relative to the lower part of the population.