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Income Distribution – Concepts, Theories, and Measures
1. Introduction
📌 Income distribution refers to how income is shared among individuals or groups within an economy.
📌 It plays a critical role in economic growth, social stability, and policy-making.
📌 Economists analyze income distribution to understand inequality, poverty, and wealth concentration.
✔ Example: In a country where the top 10% earn 50% of the total income, income distribution is highly unequal.
2. Types of Income Distribution
🔹 (1) Functional Distribution of Income
✔ Focuses on how income is divided among factors of production (land, labor, capital).
✔ Key Question: How much of national income goes to wages, rents, and profits?
✔ Example: In a capitalist economy, capital owners may receive a larger share than workers.
🔹 (2) Personal Distribution of Income
✔ Examines how income is distributed among individuals or households.
✔ Key Question: What percentage of people earn high, middle, or low income?
✔ Example: The Gini coefficient measures personal income inequality (0 = perfect equality, 1 = extreme inequality).
🔹 (3) Regional Income Distribution
✔ Studies income variations across different regions within a country.
✔ Key Question: Why do some regions have higher average income than others?
✔ Example: Rural areas often have lower income than urban areas due to fewer economic opportunities.
3. Theories of Income Distribution
🔹 (1) Classical Theories (Ricardo, Marx, Malthus)
✔ Ricardo: Landowners benefit the most due to scarcity of land.
✔ Marx: Capitalism leads to exploitation of workers, causing income inequality.
✔ Malthus: Population growth affects wage levels and income distribution.
🔹 (2) Marginal Productivity Theory (Neoclassical View)
✔ Suggests that income distribution depends on the marginal productivity of factors.
✔ Workers earn wages equal to their contribution to output.
✔ Criticism: It does not explain power dynamics and wage disparities.
✔ Example: A highly skilled programmer earns more than a factory worker due to higher productivity.
🔹 (3) Keynesian and Post-Keynesian Views
✔ Keynes: Government policies (taxes, subsidies) influence income distribution.
✔ Kaldor: Saving behavior differs between workers and capitalists, affecting income inequality.
✔ Example: Taxing the rich and redistributing income through social programs can reduce inequality.
🔹 (4) Kuznets Hypothesis
✔ Suggests that inequality first increases, then decreases as economies develop.
✔ “Inverted U-shaped Curve”:
- Early Stage: Economic growth benefits the rich.
- Later Stage: Wealth spreads, reducing inequality.
✔ Criticism: Some countries experience persistent inequality even at high development levels.
4. Measuring Income Distribution
🔹 (1) Gini Coefficient
✔ Ranges from 0 (perfect equality) to 1 (extreme inequality).
✔ Higher Gini = More inequality.
✔ Example:
- Sweden (low inequality) → Gini = 0.25
- South Africa (high inequality) → Gini = 0.63
🔹 (2) Lorenz Curve
✔ Graph showing the proportion of income held by different population segments.
✔ The further from the 45° line, the greater the inequality.
🔹 (3) Income Share Ratios
✔ Compares income of top vs. bottom percentiles.
✔ Example:
- Top 10% earn 50% of total income.
- Bottom 50% earn only 10% → High inequality.
🔹 (4) Theil Index & Atkinson Index
✔ Advanced measures that account for different inequality sensitivities.
5. Causes of Income Inequality
✅ Differences in Education & Skills → Higher skills = Higher wages.
✅ Technological Change → Automation benefits highly skilled workers.
✅ Globalization → Outsourcing and trade affect wage distribution.
✅ Tax Policies → Low taxes on the rich can increase inequality.
✅ Discrimination → Gender and racial wage gaps contribute to inequality.
6. Policies to Address Income Inequality
✅ Progressive Taxation → Higher taxes on the wealthy.
✅ Minimum Wage Laws → Increases earnings of low-income workers.
✅ Universal Basic Income (UBI) → Provides a minimum income for all.
✅ Public Services (Healthcare & Education) → Improves equal opportunities.
✔ Example: Scandinavian countries have high taxes but low inequality due to social welfare programs.
7. Conclusion
✔ Income distribution is crucial for economic stability and social equity.
✔ Inequality can be reduced through progressive taxation, education, and social policies.
✔ A balanced approach between market efficiency and fairness is essential.