Question

How can we measure economic inequality?

Why might inequality increase as low income countries experience

economic growth

Answer 1

Answer-Economic inequality refers to the inequal distribution of income (the amount of money people are paid) and the inequal distribution of wealth (the amount of wealth people own). Economic inequality may exist in different forms like-economic inequality between countries or states, economic inequality between different groups of people etc.

Measurement of economic inequality focus on wealth, income, and consumption differences. There are many methods for measuring economic inequality but the most widely used ones are- Gini coefficient and Inequality-adjusted Human Development Index (HDI).

1. Gini Coefficient/Gini index /Gini ratio-

In economics, the Gini coefficient/Gini index /Gini ratio is the most commonly used measurement of inequality. It is a statistical tool to measure the dispersion in income or wealth distribution of a nation's residents. The Gini coefficient measures the inequality among values of a frequency distribution (for example, levels of income). The value of Gini coefficient ranges between 0 to 1 where of zero expresses perfect equality, and value of 1 means perfect inequality. In perfect equality all values are the same i.e. where everyone has the same income level. A Gini coefficient of one means only one person has all the income or consumption, and all others have nothing.

2. Human Development Index (HDI)-

Developed by Pakistani economist Mahbub ul Haq and Indian economist Amartya Sen and was used to measure a country's development by the United Nations Development Programme (UNDP)'s Human Development Report Office.The (HDI) is a composite index used to rank countries into four tiers of human development. It includes of life expectancy, education, and per capita income indicators of a country. when the lifespan is higher, the education level is higher, and the gross national income GNI (PPP) per capita is higher, a country scores a higher HDI rank.

The 2010 Human Development Report introduced an Inequality-adjusted Human Development Index (IHDI). The new index does take into account several other factors, such as the net wealth per capita or the relative quality of goods in a country. This helps in accurate ranking for some of the countries.

High and rapid growth often lead to a widening of inequalities in underdeveloped or developing countries. Below are some of the causes of this widening inequality in these countries-

• As the country experiences economic growth, income increases as well as standard of living increases due to an increase in per capita income. There is a high increases in pay of people in top-paying jobs which increases their gap with the lowest earning people.
• As a result of rapid economic growth, there is increasing wealth accumulation by the rich, including rising property prices, this leads to widening the gap.
• Growing gaps between urban and rural areas as the income of rich increases but that of the poor remains more or less same.
• With the rise in economic growth, there is an increasing pay of those with higher levels of education in high-knowledge industries such as computer gaming, engineering systems, financial trading. The growth of jobs and pay is usually among the employed and educated but the uneducated and poor are left behind with less income. This widens the gap in income between the rich and employed and the poor and unemployed.