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Global Economic Disparities: Income Inequality and Development Metrics

Explore the wide income gap between nations, measurement methods like Lorenz Curve and Gini Coefficient, and challenges in comparing per capita income for development evaluation. Analyze the obstacles such as low agricultural productivity and high birth rates in economic conditions analysis.

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Global Economic Disparities: Income Inequality and Development Metrics

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  1. Economic Conditions Analysis Chapter 2 part I Jamshed uz Zaman

  2. Development Gap • World Income is distributed extremely unequally between nations and people • North South: Rich and Poor • Range of Income Difference (World Bank Classification) • Low income countries ($420) • Middle income countries • High income countries ($27.510) • Degree of Income Inequality Ethiopia $ 100 Switzerland $ 38,120

  3. Lorenz Curve Two Aspects of Measurement of Income Inequality 100% International Inequality (Inequality among nations) Global Inequality (Inequality between people across the world) These may be portrayed and measured respectively by • Lorenz Curve • Gini Coefficient 100% Population World Income Low income 60% 6% Middle income 15% 17% Rich 25% 77%

  4. Inequality Rising or Falling Absolute gap between rich and the poor is increasing Easterlin 1820 3:1 2000 380:1 Global Inequality: Gini 1988 0.63 1993 0.66

  5. Per Capita IncomeMeasurement and Comparability • Per Capita Income (PCY) can be used as an Index of Development • PCY measuring poverty has three problems • National Income Accounting is weak in many countries, • Subsistence production not included, • Use of deflator inappropriate, • Illiteracy, communications and other problems collecting data, • Converting Domestic Currency into common unit of account (USD) (Purchasing Power Parity), • Understatement of living standard

  6. Measurement and Comparability (Contd.) • (GNP/Population) ÷ Exchange rate • Living standard cannot be compared easily, • Official exchange rate may be different from market rate, • PPP not only depends on traded goods but also non-traded, • Real exchange rate should be used to measure PPP, • CPI or price level can be used ∑QiPia ∑QiPib Q is geometric mean of quantities of each commodities • PPP rate of exchange (PPPR) has to be used for better comparability GNP exchange rate ------------- ÷ ----------------------------- Population under or over valuation

  7. Characteristics and Obstacles • High proportion of labor force in agriculture, • Low agricultural productivity, • High proportion of expenditure on food and basic necessities, • Exports – Primary Products: Imports – Manufacturing products • Low level of technology • High birth rate/ falling death rate • Small Savings rate.

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