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LORENZ
Z CURVE
GINI IND
DEX
This indeex measures the degree of inequalityy in the
distributiion of familyy income in aa country. Thhe index is
calculateed from the LLorenz curvee, in which ccumulative
family inccome is plottted against the numberr of families
arranged d from the po oorest to thee richest. Th
he index is thhe ratio of (aa) the area b
between a
country'ss Lorenz curvve and the 445 degree heelping line to o (b) the entire triangulaar area undeer the
45 degreee line. The mmore nearly equal a country's incom me distributio on, the closeer its Lorenz
curve to the 45 degre ee line and tthe lower itss Gini index.
KUZNET
TS CURVE Ineq
quality= Gini Index**
A Kuznetts curve is th
he graphical representation of Simon n
Kuznets'ss hypothesiss that economic inequaliity increasess
over timee while a country is deveeloping, and
d then after aa
certain average income is attaineed, inequalitty begins to
decreasee. One theory as to why tthis happen states that in
early stagges of development, whhen investmeent in physiccal
capital is the main m
mechanism off economic ggrowth,
inequalitty encouragees growth byy allocating rresources to
owards thosee who save aand invest th
he
most.
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GDP (purchasing power parity)
This entry gives the gross domestic product (GDP) or value of all final goods and services
produced within a nation in a given year.
GDP (purchasing power parity) (Billion $)
Years Pakistan Thailand Australia
2000 282 388.7 416.2
2001 282 413 445.8
2002 299 410 528
2003 311 429 528
2004 318 477.5 571.4
2005 347.3 524.8 611.7
2006 395.2 550.2 635.5
2007 437.5 596.5 674.6
2008 411.9 521.5 773
2009 392.5 508.6 752.2
900
800
700
600
500 Pakistan
400 Thailand
300
Australia
200
100
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
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GDP real growth rate
This entry gives GDP growth on an annual basis adjusted for inflation and expressed as a
percent.
GDP ‐ real growth rate (%)
Years Pakistan Thailand Australia
2000 3.1 4 4.3
2001 4.8 4.2 4.7
2002 3.3 1.4 3.6
2003 4.5 5.2 3.6
2004 5.5 6.7 3
2005 6.1 6.1 3.5
2006 6.6 4.5 2.7
2007 6.6 4.8 2.7
2008 5.3 4.8 4.3
2009 2.7 2.6 2.3
5
Pakistan
4
Thailand
3
Australia
2
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
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GDP per capita (PPP)
This entry shows GDP on a purchasing power parity basis divided by population as of 1 July for
the same year.
GDP ‐ per capita (PPP) (US$)
Years Pakistan Thailand Australia
2000 2000 6400 23400
2001 2000 6700 25000
2002 2100 6600 27700
2003 2100 6900 27700
2004 2100 7400 30000
2005 2200 8100 31300
2006 2400 8600 32500
2007 2600 9200 34600
2008 2400 8000 39300
2009 2400 7900 38300
45000
40000
35000
30000
25000 Pakistan
20000 Thailand
15000 Australia
10000
5000
0
1 2 3 4 5 6 7 8 9 10
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APPLICATION OF THE KUZNETS’S HYPOTHESIS
Kuznets’s test will be applied to the three economics taking into consideration the Gini index
and the GNP per capita to investigate and prove the followings:
HO: In early stages of development income is not distribution tends to worsen, while in later
stages it will not improve, not forming an inverted U curve (between the relationship of GNP
per capita and Gini index)
HA: In early stages of development income distribution tends to worsen, while in later stages it
will improve, forming an inverted U curve (between the relationship of GNP per capita and Gini
index)
GINI INDEX OF THE COUNTRIES
Year Pakistan Thailand Australia
2000 31.2 41.4 35.2
2001 31.2 41.4 35.2
2002 31.2 41.4 35.2
2003 33 43.2 35.2
2004 33 43.2 35.2
2005 33 43.2 35.2
2006 30.6 42 35.2
2007 30.6 42 35.2
2008 30.6 42 35.2
2009 31.2 42.5 35.2
FACTORS AFFECTING GINI INDEX IN PAKISTAN, THAILAND AND AUSTRALIA
Although there are many factors responsible for the fluctuation in the Gini index but in case of
Pakistan, Thailand and Australia the most important factors responsible for income inequality,
figured out by literature, are economic development, financial market development,
government expenditures (size of public sector), education, inflation, population growth and
openness.
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1. Economic Growth
The main factor affecting income inequality is the economic growth. The relationship between
income inequality and economic growth has received a lot of attention from the researchers.
The impact of economic growth on the income inequality is ambiguous.
2. Financial Development
Financial market has also an effect on income inequality. Theory provides different hypothesis
concerning the financial development and income inequality. Some theories (Banerjee and
Newman, 1993; Galor and Zeira, 1993; Aghion and Bolton, 1997) claim that financial
intermediary development is pro‐poor.
3. Inflation
Inflation may have a strong redistribution effect which could be positive (through its effects on
individual income wealth) or negative (through a progressive tax system). It is also argued that
higher rate of inflation hurts the poor and middle class, relatively more than rich, because later
have better excess to financial markets that allow them to hedge their exposure to inflation.
4. Government Consumption
Government Consumption is also one of the factors affecting income inequality. Income
inequality may increase or decrease with government consumption. If most of redistribution
through tax and transfer system is toward poor, government consumption might result into
greater inequality. However, it could have opposite effects if government consumption is not
developmental.
5. Population Growth
Difference in population growth is another factor explaining inter‐country variation in income
inequality. Although population growth generally declines as per capita income rises, there is
considerable variation in population growth rate among the countries at similar income level.
Generally, it is believed that faster population growth is associated with higher income
inequality. One of the reasons is that dependency burden may be higher for poor group.
6. Education
One of the most important factors underlying the income inequality is level of access to
education. There is two‐way link; on the one hand an unequal educational opportunity leads to
greater inequality in income distribution by widening the skilled and productivity gap in the
working population. On the other hand unequal income distribution tends to prevent the poor
investing in education and acquiring skill.
7. Openness of the Country for Foreign Trade
A number of studies have attempted to relate trade policy variables to economic growth
(Dollar, 1992; Sachs and Warner, 1995; Edwards, 1992). These studies found that trade
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openness is associated with more rapid growth. Dollar and Kraay (2004) found evidence in
support of the view that globalization leads to faster economic growth and a reduction in
income inequality.
GNP per capita
GNP per capita is calculated by GDP (Gross Domestic Product, the value of goods and services
produced within a country) plus net income received by residents from non‐resident sources.
GNP/capita is the total divided by the number of people in the country. In other words,
GNP/capita is a measure of national income per person.
GNP (US$)
Years Pakistan Thailand Australia
2000 1690 4850 26690
2001 1720 4970 27680
2002 1800 5220 28920
2003 1930 5600 30390
2004 2060 6030 31370
2005 2230 6420 32840
2006 2390 6970 34320
2007 2530 7480 36080
2008 2590 7760 37250
2009 2670 7980 38470
45000
40000
35000
30000
25000 Pakistan
20000 Thailand
15000 Australia
10000
5000
0
1 2 3 4 5 6 7 8 9 10
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KUZN
NETS’S PO
OVERTY H
HYPOTHES
SIS
P
PAKISTAN
Year GNP p
per capita (x)) Gini In
ndex (y)
2000 1690 31.2
2001 1720 31.2
2002 1800 31.2
2003 1930 3
33
2004 2060 3
33
2005 2230 3
33
2006 2390 30.6
2007 2530 30.6
2008 2590 30.6
2009 2670 31.2
33
3.5
3
33
32
2.5
3
32
Gini Index
31
1.5
3
31
30
0.5
3
30
29
9.5
2
29
1690 1720 18
800 1930 2060 22
230 2390 2530 25
590 2670
GNP per cap
pita
esis Proved
Hypothe d
As Pakisttan is in the sstages of deeveloping eco onomics, theerefore therre is an inverrted U structture
of the Ku
uznets Poverrty test when n applied to the Pakistann’s economyy, proving th hat in initial
stages off developme ent income d distribution ttends to be w
worsen but in the later sstages the
income ddistribution ttends to be more uniforrm and show ws improvem ment in the ddistribution o of
income; ttherefore HA will be accepted and H HO will be rejjected.
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TTHAILAND
Year GNP pper capita (x)) Gini In
ndex (y)
2000 4850 41.4
2001 4970 41.4
2002 5220 41.4
2003 5600 43.2
2004 6030 43.2
2005 6420 43.2
2006 6970 4
42
2007 7480 4
42
2008 7760 4
42
2009 7980 42.5
43
3.5
4
43
42
2.5
Gini Index
4
42
41
1.5
4
41
40
0.5
4850 4970 52
220 5600 6030 6
6420 6970
0 7480 7760 798
80
GNP per caapita
esis Proved
Hypothe d
As Thailaand is also on
ne of the developing eco onomics, theerefore there is an inverrted U structture
of the Kuuznets Poverrty test when n applied to the Thailand’s economyy, proving thhat in initial
stages off developme ent income ddistribution ttends to be w
worsen but in the later sstages the
income d distribution ttends to be more uniforrm and show ws improvemment in the ddistribution oof
income; ttherefore HA will be accepted and H HO will be rejjected.
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AUSTRALIA
Year GNP p
per capita (x)) Gini In
ndex (y)
2000 26690 35.2
2001 27680 35.2
2002 28920 35.2
2003 30390 35.2
2004 31370 35.2
2005 32840 35.2
2006 34320 35.2
2007 36080 35.2
2008 37250 35.2
2009 38470 35.2
40
0
35
5
30
0
25
5
Gini Index
20
0
15
5
10
0
5
0
26690 27680 289
920 30390 31370 32
2840 34320
0 36080 37250 384
470
GNP per caapita
esis Proved
Hypothe d
As indicaated by the w
world ranking of HDI and d other econnomy measu uring instrum
ments that
Australia is characterrized as a deeveloped ecoonomics, theerefore there is no inverrted U structture
of the Kuuznets Poverrty test when n applied to the Australiia’s economy, proving th hat in
developm ment econom mies the income distribu ution tends tto be homoggeneous. This equal
distributiion of incom
me becomes one of the ffactor that proves that A Australian ecconomy is
developeed; therefore e HA will be accepted annd HO will bee rejected.
no inverted U structure because thee economy iss developed, proving thee acceptance of
There is n
Kuznets’ss Hypothesiss.
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COMPETITIVE ANALYSIS OF THE THREE COUNTRIES UNDER THE
KUZNETS’S HYPOTHESIS
50
45
40
35
30
Pakistan
25
Thailand
20
Australia
15
10
5
0
26690 27680 28920 30390 31370 32840 34320 36080 37250 38470
In respect to the study conducted, it is concluded that Kuznets’s test is valid and applicable on
the the three economies studied. As illustrated by the diagram that both the developing
economies (Pakistan and Thailand) demonstrate the inverted U structure (although the
magnitude of the curve is decreased when positioned in the comparative diagram). On the
other hand Australia’s Gini index falls between both the developing economies but it doesn’t
mean that Australia is a developing country. According to the Kuznets test there is a uniform
distribution of income over a period of time (although it is not perfection distribution of
income) hence Australia would be considered as a developed economy.
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FINDINGS FOR UNEQUAL/EQUAL DISTRIBUTION ON INCOME
Most labor force
demand so Focused on both
Inequality is low due to
increased agriculture and
Agriculture & high manufacturing
investment in manufacturing therefore
Manufacturing activities utilizing big
agriculture sector distribution inequality is
labor force.
can reduce less.
inequality.
Expansion in service
Very vast service sector Effective trade and more
sector and real
especially tourism and opportunities in service
estate has helped in
Service sector trade has resulted in sector have helped in
reducing the
more equal income reducing the distribution
unequal income
distribution. inequality.
distribution.
More foreign
More investment from
investment has Foreign investment is
local groups therefore
resulted in more huge but with local
the distribution is among
Investments inequality of income groups having stake that
local people which help
distribution because may help a bit in
in reducing the
only top segment of narrowing the gap.
inequality.
elites benefit from it
Government
subsidies have not Strong private sector and
More privatization has
helped in reduction very less subsidies have
Government helped in less inequality
of inequality contributed in more
subsidies and local entrepreneurs
because low level equal distribution of
are emerging.
people are not income.
earning.
Huge expenditures
have resulted in
more inequality
and poverty as Government is has
income is Government expenditures empowered the private
Government
expenditures concentrated to a have helped in alleviating sector so expenditure
particular class. relative poverty. have not affected the
poor.
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Some reforms in Have a very effective and Have a big network of
past few years vast trade with many trade and FTA’s with
have helped in countries which includes countries like Thailand.
Trade Policies
more trade which FTA with Australia. This is This reduces the
is a good sign to a major source in inequality with effective
reduce inequality reducing the inequality distribution of income
Appendix
Difference between GDP and GNP
GDP GNP
An estimated value of the
GDP (+) total capital gains
total worth of a country’s
from overseas investment (‐)
Definition production and services,
income earned by foreign
calculated over the course on
nationals domestically.
one year.
Stands for Gross Domestic Product Gross National Product
GDP = consumption +
GNP = GDP + NR (Net income
investment + (government
Formula for Calculation from assets abroad (Net
spending) + (exports −
Income Receipts))
imports)
Total value of Goods and
Total value of products &
Services produced by all
Services produced within the
Layman Terms nationals of a country
territorial boundary of a
(whether within or outside
country
the country)
BIBLIOGRAPHY
Contents
• http://en.wikipedia.org/wiki/Kuznets_curve
• http://en.wikipedia.org/wiki/Lorenz_curve
• http://www.indexmundi.com/pakistan/distribution_of_family_income_gini_index.html
• http://www.tradingeconomics.com/Analytics/About‐
Us.aspxhttp://www.diffen.com/difference/GDP_vs_GNP
• http://ucatlas.ucsc.edu/gnp/gnp.html
• http://www.perc.org/articles/article688.php.
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• Mills JH, Waite TA (2009) Economic prosperity, biodiversity conservation, and the
environmental Kuznets curve. Ecological Economics 68(7): 2087‐2095
• http://www.georgetown.edu/faculty/aml6/pdfs%26zips/ups%2520and%2520downs.pdf
• http://www.idrc.ca/uploads/user‐S/10515499840pakistan‐report10.pdf
• D.P. Doessel, Abbas Valadkhani, (1998) "Economic development and institutional factors
affecting income distribution: the case of Iran, 1967‐1993", International Journal of
Social Economics, Vol. 25 Iss: 2/3/4, pp.410 ‐ 423
• http://www.pu.edu.pk/economics/pesr/PDF‐
CurrentIssue/PESR%20Summer%202008/1%20HAFEEZ%20Income%20Distribution.pdf
Diagrams
• *maxi‐pedia.com
• **http://en.wikipedia.org/wiki/Image:Kuznets_curve.png
GDP, GNP and Gini figures are taken from
• http://www.google.com/publicdata
• http://hdr.undp.org/en/media/HDR_2000_EN.pdf
• http://hdr.undp.org/en/media/completenew1.pdf
• http://hdr.undp.org/en/media/HDR_2002_EN_Complete.pdf
• http://hdr.undp.org/en/media/hdr03_complete.pdf
• http://hdr.undp.org/en/media/hdr04_complete.pdf
• http://hdr.undp.org/en/media/HDR05_complete.pdf
• http://hdr.undp.org/en/media/HDR06‐complete.pdf
• http://hdr.undp.org/en/media/HDR_20072008_EN_Complete.pdf
• http://hdr.undp.org/en/media/HDR_2009_EN_Complete.pdf
• www.indexmundi.com
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