Economic Crisis and Inequality - Assignment Example

Table of Contents Task 1 2 Task 2 3 Task 3 4 Task 4 5 References 9 Task 1 Using different factors to calculate the income distribution and consumption pattern has created inequality as it results in the use of different variables which provides different results, thereby creating inequality. The prime reason which can be attributed to the inequality between developed and developing countries is the mechanism which is adopted for calculating disposable income, which gives rise to different income level making it difficult to estimate the figures correctly. Since, imputed rent or imputed labor is not considered a part of a disposable income and is not included while calculating the income of an household or an individual it results in different estimates which thereby arrives at different figures for both the developed and developing countries. In case of developing countries imputed rent or imputed labor which a person puts while working at home or staying in his own place is considered a part of the disposable income; whereas in developed countries it is omitted which thereby creates differences between the estimates of both the countries i.e. developed and developing countries. This has been supported by the fact that certain items like of durables which is excluded from the consumption expenditure but included in the income estimates makes it difficult to calculate the same values resulting in inequality and differentiation between the estimates of both the developed and developing countries (Ortiz and Cummings, 2012). Since, the different factors which are considered while calculating the disposable income and income level differs it has resulted in developing different variables which are used for the calculation and estimation of different components. As a result the estimation of disposable income and income level is based on different underlying variables and use the different form of statistics through mean and median where the upper 5 and lower 5 percentile of the population is included to ensure that the estimates becomes more accurate and facilitates comparison between the different variables. The changes have further been looked through different variables where the inclusion of items like imputer rent or imputer labor is used whereas the purchase of luxurious items or durables are not included resulting in creating a gap between the different estimates. The degree if inequality existed when a comparison was made between developed and developing countries as the use of different variables and factors results in creating a gap between the estimates and highlights the degree of inequality which exist. Brining the required changes in the variables by including the different factors which will help to understand the degree of inequality and will look at reducing the gap which exists will help to understand the underlying reason for inequality and will help to develop the required tools through which the gap can be reduced. Further, calculating the different estimates based on reliable and non-reliable estimates resulted in covering different areas like population, income and sample size which results in inequality (Ortiz and Cummins, 2011). This will require that the different underlying variables are understood and will require the development of different fundamentals which will thereby help to ensure that the estimates are correct and will provide data which will help to reduce the degree of inequality and bring the required balance between developed and developing countries. Task 2 It has been highlighted that the different national and international factors have a role in creating differences which results in inequality as the different estimates used in the calculation of income finally gets translated into expenditure. There can be situations where the national economy might be performing well within the frontier of the country but the international condition would make the growth rate look lower than it actually is. Making a comparison between the income and expenditure will result in widening the gap and will create inequality as it would be influenced by different national and international factors which might thereby make the estimates to be flawed and will result in widening the gap and create inequality. This has been supported by the fact that currency fluctuation further widens the gap as developing economy might find that the value of the currency is undervalued in the international market where as the domestic market shows a different value resulting in inequality. The intensity of problem magnifies when unemployment and inflation is included while looking to measure the different variables. This will help to increase the gap and estimating income and expenditure based on different variables and linking both the factors will become difficult (Banerjee and Duflo, 2000) Thus, the different national and international factors have a huge role in shaping the performance of the different underlying variables which thereby results in creating inequality making it difficult to ensure correct estimates. Task 3 Inequality has an impact on the health of the economy as the policies which the government looks to deploy might not provide the desired results. This is strongly seen in case of developing countries which rely heavily on developed countries to provide them required assistance so that they can support the health facilities and requires development of standards based on international level so that the basic facilities can be provided to the resident of the country (Lansley, 2012). Since, it is the moral obligation of the government to develop the required infrastructure through which proper health facilities can be provided to the people of the country. Since, poor and developing countries are not in a position to be able to get the required infrastructure it looks for held from developed countries. Inequality at this juncture multiplies the difficulties as differences between the different estimates of developed and developing countries widens the gaps thereby making it difficult to get the required finance through which basic health care facilities can be provided (Lansley, 2012). To reduce the gap and to ensure proper financing the developed and developing countries need to develop variables which looks at reducing the gap which exist between the two estimates and looks at developing the required fundamentals through which basic facilities can be provided. This will help to develop the required facilities which will support the economy through proper health care facilities and will provide a tool through which better comparison can be facilitated between the developed and developing nations. Task 4 Inequality has an impact on the overall growth of an economy because income and wealth distribution has an impact on the performance as different economic and politico-economic reasons has an impact on the overall performance and growth of the economy. This has impacted the world economies as the different variables which are used in estimating the income and wealth of a nation has created differences which has thereby widened the gap and has made it difficult to ensure very high growth rate for the economy. This thereby impacts the future prospects of an economy and required development of proper steps through which the variations can be reduced and the overall condition of the economy can be developed. Unequal distribution of wealth has created difficulties in the financial markets as people having productive business opportunities find it difficult to raise the required finance through which developed can take place. This thereby has an impact on determining the growth rate for the economy, as it raises the fertility rate and decreases the overall investment which thereby has an impact on the education level which finally affects the economy. Thus, inequality impacts the economy indirectly and doesn’t help in developing standards which are of international level and will support the overall growth prospect for the future. Lastly, unequal distribution of wealth as has an impact on the on the domestic productivity as it restrains the economy from taking advantage of economies of scale which thereby results in higher prices and low productivity thereby having an impact on the financial condition of the people. This has a negative impact on the overall quality of competition and at times results in decisions which are unfavorable and impacts the long term prospects of the economy (Wilkinson and Pickett, 2009). Due to the vicious circle the impact is witnessed on the capital markets where people have to rely on loans at high interest to be able to deal with the financial requirements. This reduces the overall interest of the person to invest in the business as higher interest would mean lower profitability and the businessman might not be willing to take the required risk for a low return which thereby again has an impact on the long term growth prospects. This has an impact on the credit policies and makes the economy feel the burden of high interest which thereby impacts the overall growth rate in the future. This is supported by the fact that credit rationing is dependent on the ability of the employer to finance the money and in case of high interest rate the ability reduces which thereby has a negative impact. This thereby widens the gap which exist and bringing an equilibrium through which proper financing can be achieved becomes difficult and makes it difficult for an economy to project high growth rates (Irvin, 2011). The consumption pattern also gets affected due to the disparity and relationship which exists between income and wealth. In case the distribution of income of wealth and income was similar then consumers would purchase heterogeneous products; i.e. same products would be purchased with no differentiation between the purchasing habits. This hardly seems to exist and is primarily due to the disparity which exists between income and wealth. This has an impact on the consumption demand as people who have a low income look to purchase few products in fewer quantities whereas people with high wealth shows opposite reactions. This thereby has an impact on the overall wealth and income of different demand and needs thereby resulting in creating a gap between wealth and income (Atkinson and Morelli, 2011). This thereby results in a gap between actual and potential market thereby results in creating inequality between the consumption and wealth pattern. The manner in which the economy can look at developing the process through which differences can be reduced can be achieved through innovation process. The inequality in wealth creates a gap between the actual and potential economy growth rate as the poorer section of the society is unable to gather the required finance which makes it difficult to ensure growth rate for the business (Bao and Guo, 2004). This has thereby reduced the opportunities that the business has and will thereby need to develop the required mechanism through which the inequality between the wealth and income can be reduced. Looking at the degree of inequality from the perspective of politico-economic factors highlights the same results and shows the manner in which the performance has been affected. The unequal distribution of income has an impact on the private investment which finally translates into reduced growth rate as redistributive tax pressure increases which thereby has an impact on the overall growth and performance of an economy (Matsuyama, 2002). The conditions worsens to such a state that inequality will result in negative growth rates which will thereby have an impact on the socio-political environment and will curb the amount of investment which is being made in this direction. This politico-economic factor thereby creates additional pressure and makes the economy reel under the pressure of negative growth rate which thereby has an impact on the overall performance level of the economy. Thus, the overall growth of an economy is largely affected due to the disparity and inequality which exist between the income and wealth distribution between the economies. This has an impact on the private investments which is made making the economy fall under negative growth rate and reduces the amount of investment which is made in different directions. The overall impact is such that the economy starts to feel the pressure of negative growth rate which makes it difficult to sustain high growth rates and will required development of tools to reduce it. Identifying the different variables and reducing the disparity which exist will help to reduce inequality and will provide a platform through which growth can be achieved. References Atkinson, T. and Morelli, S. (2011) “Economic Crisis and Inequality’ United Nations Development Programme (UNDP) Human Development Reports, November 2011 Banerjee, A.V. and Duflo, E. (2000) Inequality and growth: what can the data say? NBER Working Paper No 7793, July Bao, Y. and Guo, J.T. (2004) Reexamination of economic growth, tax policy and distributive politics. Review of Development Economics 8(3): 474-482. Irvin, G (2011). Inequality and Recession in Britain and the USA Development and Change. Available at: http://www.george.irvin.com/D%26C.pdf Lansley, S. (2012) The cost of inequality London: Gibson Square Matsuyama, K. (2002) The rise of mass consumption societies. Journal of Political Economy 110(5): 1035-1070. Ortiz, I. and Cummins, M. (2011) Global Inequality: Beyond the Bottom Billion. Unicef Social and Economic Policy working paper, April 2011 http://www.unicef.org/socialpolicy/files/Global_Inequality.pdf Ortiz and Cummings, (2012). UN HDI website; Wealth Report; World Income Inequality Database see: http://website1.wider.unu.edu/wiid/WIID2c.pdf pp.4-7 Wilkinson, R. and Pickett, K. (2009) The Spirit Level: Why More Equal Societies Almost Always Do Better Bloomsbury Press Read More