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Income inequality metrics or income distribution metrics are techniques used by economists to measure the distribution of income and economic inequality among the participants in a particular economy, such as that of a specific country or of the world in general. These techniques are typically categorized as either absolute measures or relative measures.
Income distribution has always been a central concern of economic theory and economic policy. Classical economists such as Adam Smith, Thomas Malthus and David Ricardo were mainly concerned with factor income distribution, that is, the distribution of income between the main factors of production, land, labour and capital.
Modern economists have also addressed this issue, but have been more concerned with the distribution of income across individuals and households. Important theoretical and policy concerns include the relationship between income inequality and economic growth. The article economic inequality discusses the social and policy aspects of income distribution questions.
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Absolute measures define a minimum standard, then calculate the number (or percent) of individuals below this threshold. These methods are most useful when determining the amount of poverty in a society. Examples include:
where:
All of the above measures use income as the basis for evaluating poverty. However, \'income\' is here understood different to a common understanding: It means the total amount of goods and services that a person receives, and thus there is not necessarily money or cash involved. If a poor subsistence farmer in Uganda grows her own grain it will count as income. Services like public health and education are also counted in. Often expenditure or consumption (which is the same in an economic sense) is used to measure income. The World Bank uses the so-called living standard measurement surveys (LSMS) to measure income. These consist of questionnaires with 200+ questions. Surveys have been completed in most developing countries.
Keeping these points in mind helps to understand the problems caused by the improper use of inequality measures. However, they do not render inequality coefficients invalid. If inequality measures are computed in a well explained and consistent way, they can provide a good tool for quantitative comparisons of inequalities at least within a research project.
The question whether equality is beneficial for economic growth and progress has occupied the minds of the greatest scientific thinkers as well as policy makers. Evidence from a broad panel of recent academic studies shows the relation between income inequality and the rate of growth and investment is indeed robust however not linear.
Robert J. Barro, Harvard University found in his study "Inequality and Growth in a Panel of Countries" that higher inequality tends to retard growth in poor countries and encourage growth in well developed regions.economics.harvard.edu - Inequality and Growth in a Panel of Countries In their study for the World Institute for Development Economics Research, Giovanni Andrea Cornia and Julius Court (2001) reach analogous conclusions.wider.unu.edu - Inequality, Growth and Poverty in the Era of Liberalization and Globalization The authors therefor recommend to pursue moderation also as to the distribution of wealth and particularly to avoid the extremes. Both very high egalitarianism and very high inequality cause slow growth.
Income inequality diminishes growth potential through the erosion of social cohesion, increasing social unrest and social conflict causing uncertainty of property rights, not to talk about misery and lower life expectancy. Extreme inequality can effectively reduce access to productivity enhancement measures, or cause such measures to be allocated inefficiently toward those who already have, or can no longer absorb such measures.
On the other hand, The World Bank World Development Report 2000/2001World Bank World Development Report 2000/2001, chapter 3, box 3.5 shows, that inequality and growth are not related. Inequality neither drives growth nor does it impair growth. Other Research (W.KittererWolfgang Kitterer: Mehr Wachstum durch Umverteilung? (More Growth through Redistribution?), 2006) also shows, that in perfect markets inequality does not influence growth. In real markets redistribution contributes to growth.
Considering the inequalities in economically well developed countries, public policy should target an ‘efficient inequality range’. The authors claim that such efficiency range roughly lies between the values of the Gini coefficients of 25 (the inequality value of a typical Northern European country) and 40 (that of countries such as ChinaDue to the economic dynamics and the increasing income gap between the Chinese east cost and the rest of the country, the Gini index for China may have reached 50. Sources from China report 47 for the year 2005. With regard to the huge population in China and the challenges to data collection, a good understanding of the data is required, based on which the Gini indices are computed. and the USAUSA: Also countries like France, Germany and UK have a Gini index slightly above 40.).
The precise shape of the inequality-growth relationship depicted in the Chart obviously varies across countries depending upon their resource endowment, history, remaining levels of absolute poverty and available stock of social programs, as well as on the distribution of physical and human capital.
This article is licensed under the GNU Free Documentation License. It uses material from Wikipedia
