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Once there was a city named Giniville, where it was famous for its
prosperity and peacefulness. The city was experiencing high
economic growth. But how does economic growth help the
country?
When there is economic growth, the Production Possibility Curve
or in short, the PPC, shifts outwards, signifying
an increase in productive capacity of the country.
Points outside the PPC which could not be attained in the past
could now be attained. The reason for this high growth
is due to high investments in Research and Development
by Giniville, which increases the technology level of the country.
With high economic growth, the people there lived happily ever
after... or maybe not...
Take a closer look... Even though the town looks prosperous
and peaceful on the outside, there seems to be something
terrorising the people.
There is an emergency situation in Giniville. The town's recent
economic growth has brought about certain unwelcome effects.
Let us learn more about the situation from the citizens.
What is happening to the city?
As you can see, the city is affected by income inequality!
It is the situation in which there is an unequal
distribution of income across the whole town.
The latest Gini coefficient given to us is 0.8, which is very close to 1.
And this indicates a high incidence of inequality in the country.
What are your thoughts on the situation then?
Well, income inequality benefits me. It encourages and motivates
me to work harder. Therefore, it allows me to earn more money and
contribute to the economic growth positively.
It will also lead to an increase in my income.
Thus, we will be able to afford more goods and services and it will bring
about higher economic growth.
Let us listen to the opinions of another citizen. What are your thoughts on
the current situation in the town?
Income inequality is bad for me. Poverty will be worsened.
Poor people like me cannot borrow money to invest in productive activities because I
do not have any collateral. Can you imagine how much inefficiency it will cause the
economy? Since I do not have enough financial ability, I also cannot send my
children to school. This might end up becoming a vicious cycle as my children might
not have the chance to receive decent education. High inequality might most
probably result in social unrest if the government does not do anything
about this situation soon!
We have just seen the positive and negative effects of the income inequality.
So what will be the final outcome of the income inequality on the city?
Let's take a look at the government's stand.
Fear not, citizens of Giniville. The government has already drawn
up some policies to mitigate the effects of income inequality.
Firstly, the government will implement the progressive tax system.
This policy requires a tax that takes a larger percentage from the income
of high-income earners than it does from low-income individuals.
Simply put, the more one earns, the more taxes they pay.
Progressive taxes will reduce the size of income inequality.
Another policy will be the subsidies for the poor. The government will
be devising several financial schemes to help the less fortunate.
The taxes collected from progressive taxes can be used to fund these schemes.
Also, schools will be implementing various study loan
schemes to students facing financial difficulties.
As building human capital is very essential to further growth in the future,
we must ensure that we provide equal education opportunities to every citizen.
Although income inequality can never be fully eliminated in a country,
the negative effects from it can be mitigated using
various government policies so that it does not slow down the
economic growth of the country.
Once again, the day is saved!