Development and Inequality
Analyze poverty, development indicators, income distribution, institutions, education, health, and economic growth strategies.
A lesson of Economics, in Global Economics, about 10 minutes.
Economic Development and Inequality
By the end of this lesson, you will be able to explain why some countries are rich and others poor, measure economic inequality, and evaluate policy responses.
Why Are Some Countries Rich?
Economic development refers to the sustained improvement in living standards, productivity, and economic capacity. The gap between rich and poor countries is large and persistent.
GDP per capita of selected countries (approximate 2023):
- Luxembourg: $130,000
- United States: $76,000
- Mexico: $11,000
- India: $2,500
- Chad: $700
Explanations for income differences:
1. Institutions: property rights, rule of law, contract enforcement, and political stability allow people to invest and trade confidently. Countries with weak institutions (corruption, property insecurity) have difficulty growing.
2. Physical capital: rich countries have more factories, infrastructure, and equipment per worker. Capital investment raises productivity.
3. Human capital: education, health, and skills of the workforce. Better-educated, healthier workers are more productive.
4. Technology: rich countries use more productive technologies. Technology transfer to developing countries can accelerate growth.
5. Geography: landlocked countries face higher trade costs; tropical climates increase disease burden; natural resources can be a curse or a blessing.
6. Historical: colonial extraction, slave trade, and other historical factors continue to shape institutions and human capital.
Measuring Inequality
The Lorenz Curve plots the cumulative share of income (y-axis) against the cumulative share of population (x-axis), ordered from poorest to richest.
Perfect equality: the Lorenz curve is the 45° diagonal line (bottom 20% earns 20% of income, bottom 40% earns 40%, etc.).
Greater inequality: the Lorenz curve bows further below the diagonal.
The Gini Coefficient measures the area between the Lorenz curve and the diagonal, normalized to [0, 1]:
- 0 = perfect equality
- 1 = perfect inequality (one person has all income)
US Gini coefficient: approximately 0.41 — one of the highest among wealthy nations.
Within-country vs. between-country inequality: