Income Inequality, Economic Growth and Its Effects .
Income Inequality, Economic growth and its effects .
Abstract
“Some people are of the view that income inequality is a necessary part off the growth process, that it is generally unavoidable and that policy should focus on ensuring that everyone is doing better rather than focusing on narrowing the income gap” whilst other agrue that it hinders growth. This assignment was carried out to investigate and debate the theoretical and empirical views of the above statement as well as share my own views on the debate between income inequality and economic growth.
[2062]
Introduction The relationship between income inequality / distribution and economic growth has been the subject of many studies that have been carried out since the appearance Simon Kuznets work in the 1950s (Turnovsky and Penalosa, 2004:2). Many people are in the view that income inequality is seen as a necessary part of the growth process whilst other economists and analysts argue that income inequality undermines economic growth. Using economic theory and empirical evidence we shall investigate this relationship and express my views on this debate.
The theoretical view
Theoretical literature of today stems from Kuznets initial discovery in his 1955 paper Economic ‘Growth and Income Inequality’, presented in The American Economic review, where economic inequality increases over time whilst a country is develops and once a certain level of income per captia is reached inequality begins to decrease. This was the concept that Kuznets hypothesized which led to the creation of the Kuznets Curve (Deininger and Squire, 1998:275), which has been reproduced in APPENDIX A. Hence many are in the view that initial income inequality is acceptable and will eventually “even out” as growth occurred (as seen in APPENDIX A with the inverted U Kuznets Curve). It was due to this theory that many developing countries tolerated these high levels of income inequality arguing that it would become more
Abstract
“Some people are of the view that income inequality is a necessary part off the growth process, that it is generally unavoidable and that policy should focus on ensuring that everyone is doing better rather than focusing on narrowing the income gap” whilst other agrue that it hinders growth. This assignment was carried out to investigate and debate the theoretical and empirical views of the above statement as well as share my own views on the debate between income inequality and economic growth.
[2062]
Introduction The relationship between income inequality / distribution and economic growth has been the subject of many studies that have been carried out since the appearance Simon Kuznets work in the 1950s (Turnovsky and Penalosa, 2004:2). Many people are in the view that income inequality is seen as a necessary part of the growth process whilst other economists and analysts argue that income inequality undermines economic growth. Using economic theory and empirical evidence we shall investigate this relationship and express my views on this debate.
The theoretical view
Theoretical literature of today stems from Kuznets initial discovery in his 1955 paper Economic ‘Growth and Income Inequality’, presented in The American Economic review, where economic inequality increases over time whilst a country is develops and once a certain level of income per captia is reached inequality begins to decrease. This was the concept that Kuznets hypothesized which led to the creation of the Kuznets Curve (Deininger and Squire, 1998:275), which has been reproduced in APPENDIX A. Hence many are in the view that initial income inequality is acceptable and will eventually “even out” as growth occurred (as seen in APPENDIX A with the inverted U Kuznets Curve). It was due to this theory that many developing countries tolerated these high levels of income inequality arguing that it would become more
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