Relation Between Income Inequality And Economic Growth

Since reform and open-up, great achievements have been made in Chinese economic development. The living level is rising daily by daily, while comparing with worse and worse income inequality. Since 1990s, this gap become more serious , which caused great attention of the scholars in or out of China. There are many arguments on whether income inequality is positive or negative to economic development. I think on one hand, if income inequality is too large in one country, its government has to adjust it, which is detrimental for the investors' disposing ability on their returns of investment. Then the incentive on investment decrease and economic growth will be undermined. On the other hand, if the income gap becomes larger and larger, the social wealth will be focus on the minor wealthy people, which cause a lower effective demand. This is because that the consumption of high incomer will be limited by their physiology limitation, their expenditure of consumption will eventually decrease and the large part of their income will not transform into consumption. The media and low incomer have the consumption demand, but they do not have the consumption ability. Eventually, the deficiency of effective consumption will be harmful for economic growth. All in a short, income inequality is negatively corresponding to economic growth. There are three parts in this article, the first part descript current condition of income and distribution and interpret what causes it. I think the income and distribution gap in our country now is very big and it will become even bigger in the following years. There are many reasons caused the income gap bigger and bigger, which concluded mainly imbalance of eastern, central and western regional economic development, the duet economic structure between urban and rural, the disorder in the field of income and distribution where there are so much unreasonable and illegal income. In the second part, we build up a mathematical model between income inequality and economic growth. From the model, we can infer the correlation of them, and then we use econometric model to test the conclusions. Firstly we build up an inter- temporal equilibrium model, in this model, every heterogeneous individual born in a different time and they play as proxy andvoter. The political and economic equilibrium determine the economic growth and initial position of the function parameter. The income inequality is more, and the equilibrium growth is lower. Secondly, we use time series model and panel data model to test the conclusion. We find they are negatively correlated, but the correlation cannot pass the significant test. We then test the correlation between income inequality and consumption demand and we find they significantly negatively correlated, which prove our conclusion. Last part gives conclusions and policy suggestions of the article, as income inequality is harmful for economic growth, I think our country should pay more attention to the adjustment of income and distribution, and prevent the gap from too huge.