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Set in turn-of-the-20th century Paris, the film opens with Honoré Lachaille (Maurice Chevalier) among high society in the Bois de Boulogne. A charming old roué, he cynically remarks that "Like everywhere else, most people in Paris get married, but not all. There are some who will not marry, and some who do not marry. But in Paris, those who will not marry are usually men, and those who do not marry are usually women." So marriage is not the only option for wealthy young bon vivants like his nephew Gaston (Louis Jourdan), who is bored with life. The one thing Gaston truly enjoys is spending time with Madame Alvarez (Hermione Gingold), whom he calls Mamita, and especially her granddaughter, the precocious, carefree Gilberte, aka Gigi (Leslie Caron). Following the family tradition, Madame Alvarez sends Gigi to her sister, Great Aunt Alicia to be groomed as a courtesan and learn etiquette and charm. To Alicia, love is an art, and a necessary accomplishment for Gigi's social and economic future. The young girl initially is a very poor student who fails to understand the reasons behind her education. She enjoys spending time with Gaston, whom she regards as an elder brother.
After Gaston publicly embarrasses his cheating mistress and tries to rebuild his reputation with endless parties, he decides to take a vacation by the sea. Gigi proposes if she beats him at a game of cards he must take her and Mamita along. He accepts, and she happily wins. During their holiday, Gigi and Gaston spend many hours together, and the two learn Honoré and Mamita once were romantically involved before becoming comfortable friends. Alicia insists Gigi's education must increase dramatically if she is to catch a prize such as Gaston. Gigi is miserable with her lessons, but endures them as a necessary evil, though she still seems awkward and bumbling to her perfectionist great-aunt. When Gaston sees Gigi in an alluring white gown, he tells her she looks ridiculous and storms out, but later returns and apologizes, offering to take her to tea to make amends. Mamita refuses, telling him a young girl seen in his company might be labeled in such a way as could damage her future. Enraged yet again, Gaston storms out and wanders the streets of Paris in a fury.
Realizing he has fallen in love with Gigi, who no longer is the child he thought her to be, Gaston returns to Mamita and proposes he take Gigi as his mistress, promising to provide the girl with luxury and kindness. The young girl declines the offer, telling him she wants more for herself than to be passed between men, desired only until they tire of her and she moves on to another. Gaston is horrified at this portrayal of the life he wishes to give her, and leaves stunned. Gigi later decides she would rather be miserable with him than without him. Prepared to accept her fate as Gaston's mistress, Gigi emerges from her room looking like a woman. Gaston is enchanted and takes her to dinner at Maxim's, where she seems perfectly at ease. The stares of other patrons make Gaston extremely uncomfortable as he realizes Gigi's interpretation of things may have been accurate after all, and discovers his love for her makes the idea of her as his mistress an unbearable one. He leaves the party with Gigi in tow and takes her home without explanation. After wandering the streets throughout the night, he returns to Mamita's home and humbly asks for Gigi's hand in marriage.
The final sequence reverts to Honoré Lachaille, proudly pointing out Gaston and Gigi riding in their carriage in the Bois de Boulogne, which is filled with high society. The couple are elegant, beautiful, and happily married. Honoré has been a framing device for the film, which can be seen as a romantic victory of love over cynicism.