Question

1a) What are the difficulties associated with international comparisons of income inequality?

b) What are the difficulties associated with international comparisons of poverty?

c) What are the difficulties associated with international comparisons of GDP per capita?

Answer 1

Since, most difficulties in measurement of these three variables remains the same, I have described them and the meaning of each of the three terms, and then stated, the difficulties which countries face in making international comparisons among the three given variables.

1) Income Inequality refers to the differences or wage gaps between the richest and the poorest sections of the society. The larger the income inequality, the more the disparity in access to modern facilities such as education, health care, nutrition etc.

2) Poverty generally refers to those sections off the society which live under a particular number in terms of their daily, weekly or monthly salary.

3) GDP is defined as the gross domestic product which is the final value of all goods and services produced in a country. When we divide this production level by the total population in a country, we arrive at the GDP per Capita income. Which is the distribution of these goods among the residents of a country.

The difficulties in estimation of the three tools is as follows: -

1) Nature of the Economy: -

There are countries which are developing, underdeveloped or developed in terms of their resources, infrastructure, government spending and the availability of capital resources. Comparing two extreme countries gives us the picture that there are wide scale differences among the same. However, we need to know, that not all economies are the same, and that their access to resources and the development levels are different. Therefore, there is enough evidence that we cannot compare two extreme economies on the parameters discussed above. The following example will help in clarifying the same.

Consider, two economies such as the United States of America and India. When we compare these two countries on the basis of the parameters given above, we do not analyse that the countries are different and while one is on its growth path, the other has already developed. The overall growth in a developing economy may be in double digits, however, income inequality and poverty levels may remain high. We need to thus understand that both the countries are different in nature and their economics is at a different stage. These differences need to be considered when making any comparisons.

2) Exchange Rate and Inflation: -

The exchange rate of different currencies is different and so is the inflation levels. When we measure poverty, we do not consider cost of living to be a consideration. We conclude that people living below the poverty line for an example are higher in number than in another country. What we fail to understand is that the cost of living in one country is different from that of another, primarily due to forces of exchange rate which is the rate at which the currency is exchanged in the market place, and variables such as Inflation also need to be taken into account.

We cannot unilaterally define, GDP per capita for an example, without taking into consideration these important elements.

3) Population Size and Growth: -

While looking at factors such as GDP, Poverty and Income Inequality we also need to consider the size of the total population. Larger countries such as India, have low per capita income GDP and yet their growth rate remains high. The core reason for this is the fact, that larger countries have high population and are computed on the basis of the same. Therefore, an increase in GDP would not reflect correctly if we divide by the total population and compare the same with a country which does not have significant population growth.

4) Cyclical Fluctuations: -

While assessing these 3 Variables, we also need to consider cyclical fluctuations such as Recession in a country and factor it so that both countries are at the same level. For example, if the United States is going through a recession, it would seem that its GDP per capita income has fallen when compared to China which would fall in some days due to the global impact. However, we need to factor the change in cyclical fluctuations and consider the fact, that global economics takes time to impact one another while assessing factors such as Poverty and Income distribution.

5) Political Conditions: -

Some countries are more willing to adopt changes and have politically fit environments that help the country in growing while others may not have such conditions. When we estimate factors such as poverty or income inequality, we do not consider these political conditions to play a vital role, and therefore fail to compare two or more countries appropriately. Equal consideration is required for these types of variables also for estimation.

Please feel free to ask your doubts in the comments section.