economic inequality and poverty

economic inequality and poverty

Introduction

Achieving economic prosperity is the aspiration of every state and nation.In order to achieve economic excellence in a country, it is necessary to assess the distribution of various aspects of the economy among different groups in society.The existing inequality of distribution is called economic inequality.

The distinction between economic inequality and poverty is crucial.Economic inequality is the unequal distribution between the rich and the poor.Poverty, on the other hand, is a measure of economic excellence in all areas of the population below average.

Types of inequalities

Inequality in income distribution is the existence of an uneven distribution between various groups in terms of the income they generate. The income which is the basis of the type of economic inequality involves any earnings derived from employment as well as the money from investments. It is characterized by a presence of individuals with high income levels being few as compared to low income earners that form the majority of the population.

Pay distribution inequality involves the existence of a gap in terms of different payments structures for a company as well as various groups in the society in comparison to the level and amount of work done. It differs from income distribution in that it only involves earnings derived from employment only as opposed to income inequality which involves employment and investment earnings.

On the other hand, inequality on wealth distribution is based on the same principle as that of the income distribution inequality. Wealth is defined as the total assets that are owned by an individual or household. Therefore wealth inequality is the uneven distribution of total assets in a certain group of people. It is characterized by few individuals accumulating much wealth as opposed to majority people having less wealth.

The Gini coefficient 

This internal assessment majors on the Gini co efficient. The Gini coefficient is used to measure a distribution inequality that is present in the entire society as opposed to comparing the different income or wealth groups.  In our case we are to investigate the income distribution inequality present in the Hong Kong and Guangzhou economy as well as compare the inequalities (“Gini Index Definition.”)

To compare the economic inequalities of Hong Kong and Guangzhou it is necessary to have an in-depth understanding of the Gini co efficient. As earlier seen, the Gini co efficient is a tool used to analyze the distribution of income or wealth. The Gini co efficient was developed by Corrado Gini[1] in the year 1912 through his publication on his paper “”Variabilità e mutabilità”.[2]

Calculation of the Gini co efficient

The formula calculating the Gini coefficient is as follows:

G = 1 − ∑ k=1n (Pk − Pk−1) (Rk − Rk−1)

G – Gini coefficient

Pk – cumulative proportion of population

Rk – cumulative proportion of values

Steps involved in calculating the Gini Coefficient include;

Step 1: Prepare a table titled Gini co efficient Example 1 as well as arrange the data. Ensure that rows are arranged from the poorest to the richest. The table should incorporate a fraction of income column as well as a fraction of population column

Step 2: Indicate the ‘percentage of richer Population’ column by summing all items in ‘Fraction of Population’ at the row below.

Step 3: Compute the Score for every row.

The score is obtained by summing the fraction of the population and twice the percentage of richer Population followed by multiplying it with the fraction of the income.

Step 4: Sum all the scores

Step 5: Compute the Gini coefficient. The formula = 1 – Sum

Gini coefficient calculation of Hong Kong

= (0.37 + 2* 0.30) 0.6 = 0.582

G= 0.418

Guangzhou

= (0.4+ 2* 0.32) 0.57 = 0.593

G= (0.4+ 2* 0.32) 0.57 = 0.407

(“GINI Index (World Bank Estimate) – United States, China.”)

It is clear that neither Hong Kong nor Guangzhou have perfect equality or inequality. However, based on the above statistics it is clear that the income distribution in Guangzhou is more favorable as compared to that of Hong Kong.

The coefficient falls from 0 to 1 where zero represents perfect equality and 1 represents perfect inequality. Therefore a high Gini co efficient such as 0.7 shows greater inequality while a low Gini co efficient represents a lower inequality.  The interpretation of having a Gini co efficient such as 0.7 is that   individuals earning high income or wealth gets a higher percentages of the total income or wealth .

It is important to note that a difference in the level of Gini co efficient is evident while considering wealth while examining the inequality. The co efficient is likely to change depending on the economic aspect measured. Wealth inequality is hard to evaluate as opposed to income. In many circumstances the wealth Gini co efficient is higher compared to the income Gini co efficient (“Gini Coefficient.”).

The Graphical representation of the Gini co efficient

The Lorenz curve is a graphical representation of wealth or income distribution.  It plots the percentages of total income in the y axis that is earned by the bottom percentage of the population.

The Graphical representation of the Gini co efficient is through the Lorenz curve as shown below

Table 1: Gini goefficient in graph.

In the figure above, the Lorenz curve shows the inequality distribution degree.  The 45 degree line shows the perfect equality in distribution. A larger curvature indicates the more inequitable the distribution is and the smaller the curvature the less inequitable the distribution is. (Juhi. “Gini Coefficient and Lorenz Curve.”)

While computing the Gini coefficient we consider the area of the region that falls between the Lorenz curve and perfect equality line as well as the area under the Lorenz curve. If the area of the region that falls between the Lorenz curve and perfect equality line is N and the area under the Lorenz curve is O therefore the Gini coefficient is N/ (N+O).

Based on the mathematical computation of the Gini co efficient of Hong Kong and Guangzhou, Hong Kong seems to have a larger curvature of the Lorenz curve as compared to Guangzhou.

It is critical to note that the Gini co efficient can be used to measure the deviation which is expressed as an inequality in the form of diverting from the perfect equality line.  For a Lorenz curve that deviates further from the 45 degree line it shows a high Gini co efficient which interprets to less equality in distribution of income.

Interpretation of the Gini co efficient of Hong Kong and Guangzhou.

Based on the earlier findings it is clear that Hong Kong seems to have a higher income inequality as it possesses a higher Gini co efficient as compared to the Gini co efficient of Guangzhou. It is therefore evident that the rich in Hong Kong generate a higher percentage of income as compared to the majority of the low income earners hence the huge gap between high income earners and low income earners.

It implies therefore that the labor market forces are more favorable in Guangzhou as compared to honking. There seems to be an average demand on labor and high supply hence the presence of an inequality. However, the demand for labor in Guangzhou is more as compared to that in Hong Kong. It is also clear that the average residents of Guangzhou with a good education are more compared to the population in Hong Kong hence attributing to the disparities in the distribution of earnings.

[1] Corrado Gini is an Italian statistician by the name

[2] Variabilità e mutabilità meaning variability and mutability