Inequality of Income and Economic Growth Assignment Sample

• Subject Name : Economics

Inequality Within a Country Is a Natural Consequence of The Early Stages of Economic Development

Economic development in a given country is highly affected by the inequality levels among its citizens. Inequality among citizens creates gaps in economic development as there is no uniform distribution of resources among citizens. In the early stages of economic development, inequality is always a present factor that results from the uneven distribution of resources due to phase developments (Shallaby et al., 2020). At the introduction phase of economic growth, there is a possibility of having uneven developments which is a common consequence. In this essay, inequality will be explained in relation to economic growth and development and it will focus on how it is aiming at upward mobility in an economy (Hillier and Chusseau, 2013).

Monetary development diminishes poverty since development has little effect on salary imbalance. In the data set income inequality ascends on average under 1% a year (Galbraith, 2012). Since salary dispersions are moderately steady after some time, financial development will in general raise salaries for all citizenry, including poor people. The development represents a significant method for decreasing destitution in the developing world. Financial development decreases neediness since development has little effect on salary imbalance (Bruckner et al., 2014).

Inequality can take different forms whereby it may include varying levels of education, allocation of resources, and even other major differences that influence the economic evaluation. Inequality can create upward mobility whereby there may be an increase in social class (Heckman and Mosso, 2014). In this case, people within the high rank are expected to move upwards in terms of social class and this would have a direct influence in terms of widening the economy of a country. As opposed to the perception of many people, inequality has a neutral consequence on economic growth and development, mostly in the early stages of development. Just as a coin, inequality has two sides, positive and negative (Cingano, 2014). 

Inequality generates an incentive to work and to be employed. The differences in the level of income between people in a country motivate and encourage the middle and lower class to work harder to have a better life. Inequality acts as a benchmark and motivator to work harder and attain better outputs and generate economic development and growth (Grusky, 2018).

Inequality motivates people to invest more capital for a better outcome. People who invest a larger amount of money are known to do well economically hence motivating low capital investors to invest more capital. This helps in upward mobility on better economic growth and development. Also, in inequality, high-income earners tend to invest more hence boosting the overall growth of the country (Kumar, 2020). Citizens in the upper-class level of the income distribution, tend to invest a larger amount of money in various activities aiming to generate more income. Such investment boosts economic development and growth for the country hence encouraging upward mobility and economic development. Inequality, therefore, is a neutral factor when analysed in terms of economic growth and development. Apart from discouraging economic development in various ways, inequality boosts the economic development and upward movement of the economy (Cojocaru, 2018).

It is believed that high levels of inequality hinder economic growth in relatively poor nations. However, it may encourage growth in richer countries.Inequality benefits economic growth by generating an incentive to work and raising investment. This is because differences in the rate of return will boost more people to attain a higher level of education (Jhinghan, 2016). Thus, greater inequality leads to more investment, provided that high-income groups save and invest more.

Inequality results in upward shifts of citizens thereby resulting in more economic and social stability. Economic growth is highly influenced by the social welfare of citizens and therefore inequality among citizens would result in having different levels of contribution by citizens (Lareau, 2011). The upward mobility of citizens increases the contribution levels made by citizens to a country thereby the contribution widens the economic performance of a country.

As suggested by Kuznets, inequality in poorer nations was a transitional phase and once these countries became more economically developed, it would reverse itself (Öztürk, 2019). This explains the narrowing of inequality in the more economically developed nations. Thus, inequality in poorer countries would eventually fall as they became richer. With economic development and technological progress, inequality within a nation widens. Although both skilled and unskilled workers are adversely affected by technological progress unskilled workers are affected more. With development, the need for unskilled labor falls, leading to unemployment (Ms. Dabla-Norris, 2015). As a country expands, inequality also expands initially. Some research shows a negative relationship between economic growth and inequality while others claim the opposite. The relationship between inequality and growth depends on several factors and varies from country to country.

The issues associated with economic inequality are always universal problems. Republicans, democrats, and economists put many completely different perspectives on the economic inequality which led to the distinction in the policies that they used to reduce or limit the growth of inequality, causing results in the changing of society (Elliot and Machin, 2018). Conservative thinkers believe in the free enterprise which gives people chances to make their own economic decision, and the economical control of government weaken the economy. While Liberal thinkers believe that economic inequality is the cause of most social problems. Angus Deaton, an economics professor at Princeton, said that "Inequality is not the same thing as unfairness; and, to my mind, it is the latter that has incited so much political turmoil in the rich world today" (The Belltowers, 2019).

Economists believe that many types of inequality can be fair or unfair. For example, an inventor creates his product to sell at a price that makes him or her rich which extend the gap of wealth. Although the wealth gap between an inventor and customers is widened, the customers get a product that makes their life easier and increase slightly their income (OECD, 2020). In this situation, most economists believe that economic inequality is completely fair because of the rich's diligence. In another case, a woman can easily get the government's permission and license for her own business because her husband has succeeded in defending the budget for the government. She and her husband would get rich and it is unfair to people (Pew Research Center, 2019). Economic inequality can promote the economic growth of a country, motivate people to work hard to get more money, avoid the destruction of economic equality, so most of the economist has awareness of advantages from these problems and they know that economic inequality is a part of the economy which can be solved by only policies (Zhuang, 2011). 

In many of the cases, it is been seen that economic development initially creates inequality.

This scenario occurs due to rapid economic growth (Pew Research Center, 2019). While a country is underdeveloped, to have growth in that country, the place should have some rapid economic development by financing some specific sectors. As a result, the economy starts growing but due to the rapid growth, inequality in some sectors does arise (Aiyar and Ebeke, 2019). This is an evident outcome of a growing economy, at least for initial years. The inequality may arise due to many of the reasons. Some of them are - Inequality in income- to obtain high growth, the growing economy may provide high income to a certain portion of the working population while others may not get that and there arises the inequality (Narayan et al., 2018). Implementation of various policies- I order to obtain rapid growth and development, various fiscal and monetary policies such as an increase in the rate of return, or reduction in interest may take place (Hassler, 2007). As a result of that inequality may arise. The vicious circle of poverty- Under this, the poor get poorer, and the rich get richer. Because in some cases it is been seen that, richer are taxed at a lesser rate compared to their income while the poor are taxed at a greater rate compared to their income (Boushey, 2019).

Thus, it can be concluded that the economic development of any country is characterized by various changes like changing from a low-level economy to a middle-class economy. In the early stages of economic growth, any given state must deal with inequality, especially in terms of income. Less developed countries have revealed a significant gap between the affluent and the poor (Keeley, 2015). In ensuring that the economy is expanding, authorities tend to reduce the gap as one way of economic development. The relationship between income inequality and economic growth does not reveal a positive relationship but does not show a cause and effect of the development. If the levels of inequality are high, emerging countries tend to have reduced growth, unlike rich countries. The developed countries reveal a U shaped graph where there is an increase in inequality at first which decreases as economic development increases. Modest increment in inequality raises the economic development but not to heighten levels which reduce the growth (Buttrick et al., 2017).

References for Inequality of Income and Economic Growth

Aiyar, S. and Ebeke, C. 2019. Inequality of opportunity, Inequality of income and economic growth. International Monetary Fund, Vol. 19, pp. 1-19.

 Boushey, H. 2019. Unbound: How Inequality Constricts Our Economy and What We Can Do about It. United Kingdom: Harvard University Press.

Bruckner, M., Mr. Gradstein, M. and Ms. Dabla-Norris, E. (2014). National Income and Its Distribution. United States: INTERNATIONAL MONETARY FUND.

Buttrick, N. R., Heintzelman, S. J., and Oishi, S. 2017. Inequality and well-being. Current opinion in psychology, Vol.18, pp. 15-20.

Cingano, F. 2014. Trends in income inequality and its impact on economic growth. OECD Social, Employment and Migration Working Papers, Vol. 163, pp. 6-54, http://dx.doi.org/10.1787/5jxrjncwxv6j-en

Cojocaru, A., GerszonMahler, D., Thewissen, S., Ramasubbaiah, R. G. N., Lakner, C., Redaelli, S., Narayan, A. and Vander Weide, R. 2018. Fair Progress? Economic Mobility Across Generations Around the World. United States: World Bank Publications.

Elliot Major, L. and Machin, S. 2018. Social Mobility: And Its Enemies. United Kingdom: Penguin Books Limited.

Galbraith, J. K. 2012. Inequality and Instability: A Study of the World Economy Just Before the Great Crisis. United Kingdom: Oxford University Press, USA.

Grusky, D. B. 2018. Social Stratification: Class, Race, and Gender in Sociological Perspective. United States: Taylor & Francis.

Hassler, J. 2007. Inequality and mobility. Journal of Economic Growth. Vol.1, pp. 2-42.

Heckman J. J. and Mosso S. 2014. The Economics of Human Development and Social Mobility. Annual Review of Economics. Vol. 6, pp. 689-733.

Hillier and Chusseau. 2013. Growing Income Inequalities: Economic Analyses. United Kingdom: Palgrave Macmillan.

Jhinghan, M. L. 2016. Micro economic Theory. New Delhi: Vrinda Publications

Keeley, B. 2015. Income Inequality: The Gap Between Rich and Poor. United Kingdom: OECD.

Kumar, C., Ayanore, M., Shalaby, H. R. and Pandey, U. C. (2020). SDG10 – Reduce Inequality Within and Among Countries. United Kingdom: Emerald Publishing Limited.

Lareau, A. 2011. Unequal Childhoods: Class, Race, and Family Life. University of California Press.

Ms. Dabla-Norris, E., Mrs. Suphaphiphat, N., Tsounta, E., Mr. Ricka, F. and Ms. Kochhar, K. 2015. Causes and Consequences of Income Inequality: A Global Perspective. United States: International Monetary fund.

Narayan, A., Ramasubbaiah, R. G. N., VanderWeide, R., Cojocaru, A., Lakner, C., Redaelli, S., Gerszon Mahler, D. and Thewissen, S. 2018. Fair Progress? Economic Mobility Across Generations Around the World. United States: World Bank Publications.

OECD. 2008. Growing Unequal? Income Distribution and Poverty in OECD Countries. Ukraine: OECD Publishing.

Öztürk, I. 2019. Environmental Kuznets Curve (EKC): A Manual. Netherlands: Elsevier Science.

Pew Research Center. 2019. Democrats Split On Why People Are Rich Or Poor. [Online]. Available at: http://www.pewresearch.org/fact-tank/2017/05/02/why-people-are-rich-and-poor-republicans-and-democrats-have-very-different-views/. [Accessed on: August 29^th, 2020]

Pew Research Center. 2019. Inequality, Poverty Divide Republicans More Than Democrats. [Online]. Available at: http://www.pewresearch.org/fact-tank/2014/01/29/inequality-poverty-divide-republicans-more-than-democrats/. [Accessed on: August 29^th, 2020]

Shalaby, H. R., Pandey, U. C., Ayanore, M. and Kumar, C. (2020). SDG10 – Reduce Inequality Within and Among Countries. United Kingdom: Emerald Publishing Limited.

The Belltowers. 2019. A Conservative Response To Income Inequality. [Online]. Available at: http://thebelltowers.com/2014/12/04/a-conservative-response-to-income-inequality/. [Accessed on: August 29^th, 2020]

Zhuang, J. 2011. Poverty, Inequality, and Inclusive Growth in Asia: Measurement, Policy Issues, and Country Studies. Philippines: Anthem Press.

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