Income Inequality vs Economic Growth - Term Paper Example

? Income Inequality vs. Economic Growth Table of Content Page 0 Introduction…………………………………………………3 1 Overview……………………………………………………..3 2.0 Main Body: Effects Analysis………………………………..3 2.1 Positive Effects on Economic Growth...…………………….4 2.2 Negative Effects on Economic Growth………….………….5 3.0 Conclusion……………………………………………………7 4.0 Reference………………………………………………………9 1.0 Introduction There is an assured rapport between Income inequality and economic growth. Income inequality may either benefit an economy or derail the economic growth. The extent to which income inequality negatively affects the economic growth is debatable. This essay provides an elaborate argument about the degree in which income inequality may affect the economy. Overview This essay provides an overview of some of the ways in which income inequality may influence an economy. It contains several ideas regarding the degree in which income inequality may affect growth of an economy. It provides thorough analysis of possible positive effects of income inequality and the negative effects of income inequality on an economy. This essay covers an elaborate debate which clearly points out at risks that may be imposed on an economy due to income inequality. 2.0 Main Body: Effects Analysis Income inequality is instigated by supply and demand for labor caused by imperfect competition and uneven distribution of information. Income inequality may have different effects on economy. It may either drag or catapult growth of economy. The central theme of this analysis is to make an evaluation about the degree in which income inequality may negatively affect economic growth. 2.1 Positive Effects on Economic Growth High income inequality may be vital for economic growth. This is because there may be increase in production caused by available cheap labor. There may be available cheap labor which is very vital in promoting production. Income inequality may also reduce level of money circulation in the economy because less income earners may not have a lot to spend. Excessive money in circulation may have extremely negative effect on the growth an economy due to inflation. Foreign trade may be very expensive especially when a country tries to import raw materials. Moreover, low income earners may tend to borrow money from financial institutions and this can be used as a tool for controlling money circulation (Castello-Climent 2010, 293-315). Additionally, there income inequality may result into wide gap between the rich and the poor. Wider gap between the rich and the poor can be very helpful in promoting competition and innovativeness. There is a high level of social stratification which prompts competition for status thus spurring growth of the economy due to hard work (Judis 2013, n.p). Also high income inequality may decrease efficiency because of low incentive to work. Because of income inequality, the rich will always get richer and save money for investment (Allen 1999, 143-150). Furthermore, high income earners may enjoy all the facilities such as the recreational facilities present in the country thus increasing revenue earned from these facilities. Happiness which is associated with high income contributes a lot in predicting the future behaviors such as productivity in the labor market and happier people also tend to be healthier and live longer (Shin 2012, 2049-2056). 2.2 Negative Effects on Economic Growth Nevertheless, income inequality has an adverse effect on the growth of an economy. Equal income inequality reduces the gap between the rich and the poor thus leading to distributive efficiency within a country. Distributive efficiency reduces marginal utility of resources and further lowers personal utility. An extra dollar consumed by a low income earner is automatically directed to necessities which are useful in increasing utility to the consumer (Judis 2013, n.p). Additionally, Income inequalities may affect the government operations by increasing political instability in the country. In this regard, the government may not smoothly implement their policies such as increasing taxes on some commodities because of public opposition. This really shows negative influence of income inequality to an economy (Power & Frandji 2010, 387-390). Furthermore, payment of low income by companies may induce the public to boycott a company’s products thus tampering with the growth rate of the company and eventually the overall economy (Castello-Climent 2010, 293-320). Low consumption of products has a negative effect on the growth of economy. If the products cannot be bought then it implies that the level of revenue produced by the company will go down and eventually reduce corporation tax collected by the government. Moreover, low income earners may not be motivated to work and be productive to a country hence slowing economic growth (Shin 2012, 2049-2056). Still, low income individuals may not have extra money to go for holidays and enjoy their leisure times. Inability to use recreational facilities may mean underutilization of those facilities. Not much revenue will be collected from the low income earners to carry out economically viable projects. In addition, an individual who does not properly enjoy leisure time due to insufficient income may not be as productive as the high income earners who have enough money to relax (Judis 2013, n.p). Moreover, there are great issues of over dependence on other families regardless of the low income. Overdependence may hinder most low income families from saving and investing. This is because the money they could have used in saving or investment is used in supporting the dependent. Additionally, a large number of people do not have enough resources to go to better schools and other lucrative learning institutions that would satisfy their needs. Better schooling is very necessary in providing skills that are vital in stirring economic growth (Castello-Climent 2010, 293-315). Furthermore, health facilities can also not be easily accessed thus increasing number of deaths. Deaths contributed by low income leads to loss of some great skills important to spur economic growth. People who lose their families to poverty related problems such as failure to buy drugs are really depressed. In addition, low income earners may engage in criminal activities that expose the citizens to dangers such as losing properties thus discouraging development and economic growth (Shin 2012, 2049-2056). Low income may further lead to serious mental and physical health issues thus making victims to die younger due to inadequate diet and lower quality of life. Health status of the citizens is largely related to economic growth and therefore inadequate access to health care due to income inequality may negatively affect an economic growth (Shin 2012, 2049-2056). In addition, income inequality may hinder low income earners from accessing quality education. Lack of adequate education may result into low income jobs which is one of the major causes of poverty. There will be no great skilled brains to run the economy. Inadequate education may prevent an individual from acquiring nice job that may eventually lead to a better life. Good paying job that may result from quality education may also imply high tax revenue for a country that is used in boosting the economy. Uneducated individuals may not be able to get good paying jobs which in turn generate low revenue for the government. Unskilled individuals resulting from income inequality may greatly derail economic growth (Power & Frandji 2010, 387-390). 3.0 Conclusion It is therefore apparent that income inequality prompts more harm to the economic growth than good. Although income inequality may boost production of goods and services in an economy, the ultimate effect is very dangerous to the economy. Unless income inequality is reduced to a particular standard, it may be very harmful to the economic growth. With the current recovery in global recession and economic meltdown, the governments should try as much as possible to control the ever rising income inequality. Conclusively, income inequality imposes serious risks to an economic growth. It negatively affects economic growth to a larger extend and therefore it should be controlled as much as possible. References Allen, J 1999, 'Responding to unemployment and inequalities in income and health', European Journal of Psychotherapy & Counselling, 2, 2, pp. 143-152, E-Journals, EBSCOhost, viewed 25 July 2013. Castello-Climent, A 2010, 'Inequality and growth in advanced economies: an empirical investigation', Journal of Economic Inequality, 8, 3, pp. 293-321, E-Journals, EBSCOhost, viewed 25 July 2013. Judis, John, B 2013, Paul Krugman vs. Joseph Stiglitz How income inequality could be slowing our recovery from the Great Recession,’ The New Republic, 30 January, retrieved 25 July 2013, . Power, S, & Frandji, D 2010, 'Education markets, the new politics of recognition and the increasing fatalism towards inequality', Journal Of Education Policy, 25, 3, pp. 385-396, E-Journals, EBSCOhost, viewed 25 July 2013. Shin, I 2012, 'Income inequality and economic growth', Economic Modelling, 29, 5, pp. 2049-2057, E-Journals, EBSCOhost, viewed 25 July 2013. Read More