Pakistan Economy MGT-322

Lec # 12 Economic Inequality Instructor: Miss Moniba Sana

Economic inequality
Economic inequality measures the disparity between a percentage of population and the percentage of resources (such as income) received by that population. Economic Inequality is the gap between rich and poor Economic inequality can be defined in terms of income , resources, provisions of facilities like education, health and nutrition This inequality can be measured among individuals, from society to society and among countries. Mostly economist measures this inequality by comparing the total amount of income received by the individuals irrespective of the source of the income is received.

Economic Inequalities can occur for several reasons:

Physical attributes distribution of natural ability is not equal Personal Preferences Relative valuation of leisure and work effort differs Social Process Pressure to work or not to work varies across particular fields or disciplines Public Policy tax, labor, education, and other policies affect the distribution of resources

Measuring Inequality
The Lorenz Curve The Lorenz curve represents the distribution of income; it expresses the relationship between cumulative percentage of households and cumulative percentage of income.

Measuring Inequality
Lorenz Curves It shows the actual relationship b/w the %age of income recipients and the %age of the total income they did receive

Gini coefficient
Gini coefficient is measured graphically by dividing the area between the perfect equality line and the Lorenz curve by the total area lying to the right of the equality line in a Lorenz curve diagram Is most convenient and shorthand measure of the relative degree of inequality It is the aggregate inequality measure and varies from 0 (perfect equality) to 1 (perfect inequality)

Gini-Coefficient

Kuznets Inverted-U Hypothesis

In early stages of growth distribution will tend to worsen Only at later stage it will improve Reason: Structural adjustment costs Steady process of modern sector enlargement will improve distribution However, enrichment of the two sectors would tend to pull inequality in opposite direction

Effects of Economic Inequality

It has different worse effects on the economy and a few of them are explained in following Social crime increase Law and order situation become worse Low level of living standard Low savings that cause the low level of capital formulation low economic development