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Economics - Essay Example

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Inequality and Growth Contents Contents 2 Causal Link between Growth and Inequality in Theory 3 Empirical Evidence of the Causal Link between Growth and Inequality 10 Case Study on the Basis of OECD Countries 13 Works Cited 19 Name of the of the Professor Course Number Date Inequality and Growth Causal Link between Growth and Inequality in Theory In the contemporary world, the state of economic affairs in the nations is run by the mixed economic principles…
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Economics

Download file to see previous pages... The political parties in most of the economies try to enhance the lifestyle of the individuals through economic growth and income redistribution in the market. Redistribution of income and raising the standard of living in society are mutually exclusive goals of the government. Figure 1: Economic Growth (Source: Scully, “Economic Freedom and the Trade-off between Inequality and Growth”) The economic freedom of a country is directly proportional to the level of economic growth in it. Figure 2: Income Inequality (Source: Scully, “Economic Freedom and the Trade-off between Inequality and Growth”) On the other hand, the level of income inequality is desired to fall with the rise in the level of economic freedom and hence, economic growth. However, there is a strong debate regarding the relationship between income inequality and income growth. Economic Inequality is the discrimination among individuals in terms of income or wealth. It basically elaborates the differences among the individuals of a society in terms of their income, wealth and assets. Income Inequality can either be absolute or relative. Absolute income is the gross income received by the individuals. John Maynard Keynes states that the consumption expenditures of individuals are estimated on the basis of absolute income. Thus, absolute income inequality is the income inequality that denotes the differences in gross income thresholds of the individuals. James Duesenberry claimed that savings and consumption spending decisions of the individuals do not depend on the level of absolute income. Instead, it depends on the relative income level. The savings and consumption expenditures of the individuals are made by them after analyzing their position of income relative to others. Relative income inequality would occur when the absolute income levels would be unevenly distributed in an economy (NBER). Among all the methods, the most important method of measuring income inequality is Gini Coefficient measurement method. This measure estimates the statistical dispersion of income distribution of a nation. The value of income inequality on the basis of a frequency distribution is given by the Gini Coefficient. The value of this index lies from 0 to 1. Where, 0 indicates a situation of perfect income equality and 1 indicates a situation of perfect inequality of income. The diagrammatical representation of a Gini Coefficient is provided is a Lorenz Curve. Figure 3: Lorenze Curve Perfect Income Equality Line Income Inequality Cumulative % of Income Lorenze Curve Cumulative % of Population (Source: Authors Creation) The above graph is of a Lorenze curve (the convex curve). The distance between the perfect income equality line and the Lorenz curve measures the degree of income inequality. Therefore, greater the distance, greater is the level of inequality. The above coefficient is calculated by: It is believed that a greater extent of inequality in income in a nation implies the concentration of economic power in the hands of a small group of individuals. In such a situation, the producers in the market get tempted to allocate resources to luxuries and comfort products, instead of basic necessities. The lack of basic necessit ...Download file to see next pagesRead More
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