Inequality 2
Economics: IB Diploma, topic 2.4.6
Benefits and Costs of an Unequal Income Distribution
There are costs and benefits to unequal income distribution:
Benefits of unequal income distribution
- There are several benefits of unequal distributions:
- Trickle down economics says that the poor may benefit from the success of the rich.
- Unequal distributions can motivate some to work hard and can encourage entrepreneurship.
Costs of unequal income distribution
- There are costs to unequal distributions:
- They will increase levels of absolute and relative poverty.
- If poverty is high, people may not be able to afford the basic needs, leading to increased levels of crime.
- If some people have a very high income, depending on the marginal propensity to import, this could lead to a worsening of the balance of trade. If income rises, people will import more.
Inequality Between Nations
As well as inequality in income within a nation, different nations have different average incomes (GDP per capita).
Globalisation and deindustrialisation
- The outsourcing of the manufacturing sector to developing nations created inequality in developed nations as the demand for manual and factory workers' skills fell drastically in the late 1900s.
- However, GDP per capita growth in nations like China has benefited hugely from this change.
- Although inequality in the USA has risen in recent years, in the last three decades, inequality between nations in the world has fallen.
Job creation or destruction
- Joseph Stiglitz (2018) argued that although many Western jobs were relocated to developing nations, jobs in developing nations were still destroyed faster than they were created.
- Although people moved out of farming to work in higher 'value-add' industries like manufacturing, more people lost jobs than gained them.
- The creation of jobs in the poorest developing countries may reduce the amount of people living in absolute poverty.
Capitalism
- Capitalism relies on firms, individual incentives and the price mechanism to allocate resources.
- Although this has led to economic growth, many people believe that government policies to manage inequality between nations and within nations is needed.
- The UK allocates 0.7% of Gross National Income towards foreign aid.
Test yourself on Inequality 2
Why might inequality worsen the balance of trade in a nation?
Who argued that although many Western jobs were relocated to developing nations, jobs in developing nations were still destroyed faster than they were created?