Income Inequality In Economy

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Analyzing the Dispersion of Wealth in Fiscal Economies Paul Kuechenmeister Econ 4331W April 8th, 2014 Introduction Multiple theories have been developed to observe the correlation between income inequality and economic growth. This paper aims to grow off of theories developed in Galor and Zeira (1993) , Barro(2000) , MacDonald and Majeed(2010) . In some countries wealth distribution is fairly even and in other countries the distribution of wealth is extremely disproportional. Which is better off, an economy with low-income inequality or high-income inequality or does wealth distribution not affect the overall economy. In this dissertation I will analyze the effects of income inequality on a country’s economic growth, arguing that the bases of correlation between income inequality and economic growth is dependent on a country’s initial state of economic standing. This thesis will argue that countries with an initial state of developed see a positive correlation between income inequality and economic growth, whereas countries with an initial state of developing see a negative correlation between income inequality and economic growth. This study examines the impact of income inequality to an economy’s growth rate. To better understand the effect of income inequality’s relation to growth rate, pieces of literature such as Kuznets (1955) as well as Galor and Zeira (1993) will be analyzed and implemented in a fashion similar to Barro (2000) literature analyzing developing economies. This study utilizes a nonparametric regression model to compare cross-country regressions. Literature Survey Economic Growth and Income Inequality by Simon Kuznets (1955) was one of the initial papers theorizing the long-term effect of inco... ... middle of paper ... ...between the gini coefficient and growth rate of Developing countries is -3.789 with a P-value of .398 and R squared of .132 and .103. Interpreting the statistical significance of the data, the p-values both hold a significance level greater than 0.05, thus we do not reject the null hypothesis. While both developed and developing countries show correlation between income inequality and economic growth, it can be seen that developed countries hold a stronger correlation with less significance and developing countries hold a slightly less correlation than developed but a stronger argument of significance. In summary, when countries are classified as developed vs. developing the income inequality shows statistical significance that in developed countries income inequality furthers economic growth and in developing countries income inequality impedes economic growth.
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