Question

Income inequality has been a key topic in American politics for quite a while now, and it is certain to play a big role in the 2020 Presidential election. While we are often reminded of the growing gap between the rich and the poor, along with the differences in wages between CEOs and the workers they oversee, we tend not to hear much about how one's income can fluctuate over time between higher or lower levels.

1. Is income inequality a major economic problem or political issue as long as the ability to move between quintiles of income is relatively common? Explain.

2. Is income really what we need to be looking at to establish one's standard of living? Why might consumption (the amount one spends on goods and services) be a better measurement? Explain.

Answer 1

1) Income inequality is a major economic problem, as all the economic activities at the end are related to maximizing the income of the producer or the consumer. It becomes a major political issue when the economy starts to suffer due to increasing poverty. Hence, even if it floats in the quintiles, income inequality will affect the growth of a particular section of the economy. This section will always be deprived of some of the other advantages or benefits and wide will start increasing day by day. The trickle-down effect does not seem to work when it comes to work when income gaps keep increasing.

2) Standard of living is not defined by the amount of money one has, but by the amount of money one can spend to avail services. Hence, income alone cannot determine the capability of an individual and if he maintains any standard of living. Also, for example, if A earns 20 lakhs a year, but pays a tax around 10 lakhs, with the inflation rate, his purchasing power, and his disposable income, both decrease. In this case, despite earning a good amount of income he is not able to purchase the goods that he can use to increase his standard of living. Consumption, therefore, becomes important and can be used as a measurement of the standard of living.