Income Inequality and Per Capita Income: Equilibrium of Interactions

Abstract

The formal theoretical model in this study provides general equilibrium evidence that a country's ranking with respect to either of income inequality (αr), or GDP Per Capita (Gr) each are better statistics for a country's `placement' in the cross-section of countries than either of actual realizations for Gini Coefficients (α) or GDP Per Capita (G). In this respect, formal theoretical proofs establish that the distance parameter, [αr-Gr] transforms the cross-section of countries into a continuous distribution for relative country inequality, with outcome G is a smooth U-shaped function of [αr-Gr]. Relations between G and α, or between Gr and αr are unable to replicate highlighted U-shaped topology. Contrary to Kuznets curves, outlined U-topology embeds not continuous evolution of G and α, but existence of optimal realizations for G and α. This is an important distinction. The formal theoretical prediction that regulation of α can, in presence of focus on achievement of incremental, as opposed to disruptive innovations, be deployed towards improvements to a country's relative welfare is empirically validated, as is the prediction that hedonistic capitalism - capitalism that does not concern itself with adverse effects of disruptive innovations on income inequality, but that is beneficial for GDP Per Capita - induces deteriorations to a country's relative welfare. Importantly, study findings produce the formal theoretical inference and empirical validation that, in of themselves, none of socialism, communism, or entrepreneurship that merely responds to presence of demand for products or services, have capacity for generation of economic development. Totality of study findings characterize the distance parameter, [αr-Gr] to be a robust proxy for `relative country inequality', demonstrates that GDP Per Capita is not a proxy for economic development, and establishes centrality of innovation activities for generation of economic development.