2. A Kuznets curve is the graphical
representation of Simon Kuznets'
hypothesis that as a country
develops, there is a natural cycle
of economic inequality driven by
market forces which at first
increases inequality, and then
decreases it after a certain
average income is attained.
3. An example of why this happens is that early
in development investment opportunities for
those who have money multiply, while wages
are held down by an influx of cheap rural
labor to the cities. Whereas in mature
economies, human capital accrual, or an
estimate of cost that has been incurred but
not yet paid, takes the place of physical
capital accrual as the main source of growth;
and inequality slows growth by lowering
education levels because poor people lack
finance for their education in imperfect credit
markets.
4. •The Kuznets curve implies that as a nation
undergoes industrialization – and especially
the mechanization of agriculture – the center
of the nation’s economy will shift to the
cities. As capitalism causes a significant rural-
urban inequality gap (the owners of firms
would be profiting, while labourers from
lagging industries and agriculture production
would be losing income), rural populations
are expected to decrease as urban
populations increase, due to people migrating
to cities in search of income.
5. • Inequality is then expected to decrease
when a certain level of average income is
reached and the processes of industrialization
– democratization and the rise of the welfare
state – allow for the trickle-down of the
benefits from rapid growth, and increase the
per capita income. This was Kuznets’ belief;
that inequality would follow an inverted “U”
shape as it rises and then falls again with the
increase of income per capita.
6. Kuznets curve
diagrams show an
inverted U curve,
although variables
along the axes are
often mixed and
matched, with
inequality on the
Y axis and
economic
development,
time or per capita
incomes on the X
axis
7. •The Kuznets ratio is a measurement of the
ratio of income going to the highest-
earning households (usually defined by the
upper 20%) and the income going to the
lowest-earning households,which is
commonly measured by either the lowest
20% or lowest 40% of income. Comparing
20% to 20%, perfect equality is expressed
as 1; 20% to 40% changes this value to 0.5.
8. •Kuznets had two similar explanations for
this historical phenomenon:
1.) Workers migrated from agriculture to
industry; and.
2.) Rural workers moved to urban jobs.
In both explanations, inequality will
decrease after 50% of the shift force
switches over to the higher paying sector.
