Unit 2 Macro: Economic Growth and Inequality

Not all of the benefits of growth are evenly distributed. A rise in real GDP can often be accompanied by widening income and wealth inequality in society that is reflected in an increase in relative poverty.

“Although economic growth in China has created vast wealth for some, it has amplified the disparities between rich and poor. Although the average wealth per Chinese citizen was $17,126 - almost double that of other high growth economies such as India - median wealth was just $6,327. In 2010, China’s Gini-coefficient stood at 0.47. Inequality in China has now surpassed that in the United States.” Source: Dr Damian Tobin School of Oriental and African Studies

The Gini coefficient is one way to measure the inequalities in the distribution of income and wealth in different countries. The higher the value for the Gini co-efficient (the maximum value is 1), then greater the inequality.

Countries such as Japan, Denmark and Sweden typically have low values for the Gini coefficients whereas African and South American countries have an enormous gulf between the incomes of the richest and the poorest elements of the population.

A good example of the uneven spread of the benefits from growth is the enormous wealth gap in China as the quote from a recent article shown on the left highlights.

When economists look at data on income and income inequality they nearly always focus on median rather than mean incomes per capita.

The reason is that the uneven distribution of income means that there are people who earn astounding salaries and wages and the income of the super-rich tends to drive up mean incomes.

For example, In the United States, mean income is almost a third higher than median income, and the gap is growing

Why does fast growth often lead to a widening of inequalities in both developed and developing countries?

• Very high increases in the pay of people in the top-paying jobs
• Increasing wealth including rising property prices
• Growing gaps between urban and rural areas
• High fertility in poorer households
• Increasing pay of those with higher levels of schooling especially with the growth of jobs and pay in high-knowledge industries such as computer gaming, engineering systems, financial trading
• Reductions in the percentage of people who are members of a trade union
• Linked effects of inequality in health and education

Much depends on the extent to which a particular government has a welfare and tax system in place and also a desire to redistribute rising incomes and wealth so that the benefits of growth can be more equitably shared out.